UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D. C. 20549

                                   FORM 10-K/A
                                 Amendment No. 1


 T   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
---
 ACT OF 1934

                     For the Fiscal Year Ended June 30, 2000

                                       OR

            TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

                           Commission File No. 1-6407

                             SOUTHERN UNION COMPANY
             (Exact name of registrant as specified in its charter)

          Delaware                                               75-0571592
(State or other jurisdiction of                             (I.R.S. Employer
 incorporation or organization)                           Identification No.)

        504 Lavaca Street, Eighth Floor                        78701
           Austin, Texas                                     (Zip Code)
(Address of principal executive offices)

       Registrant's telephone number, including area code: (512) 477-5852

           Securities Registered Pursuant to Section 12(b) of the Act:

 Title of each class                  Name of each exchange on which registered
Common Stock, par value $1 per share              New York Stock Exchange

        Securities Registered Pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes   T     No
    ----       ------

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.

The aggregate market value of the voting stock held by non-affiliates of the
registrant on September 15, 2000, was $673,574,656. The number of shares of the
registrant's Common Stock outstanding on September 15, 2000 was 49,589,799.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's Annual Report to Stockholders for the year ended
June 30, 2000, are incorporated by reference in Parts II and IV.

Portions of the registrant's proxy statement for its annual meeting of
stockholders to be held on November 14, 2000, are incorporated by reference into
Part III.


<PAGE>








     PART I



ITEM 1.    Business.

                                  Introduction

Southern Union Company (Southern Union and together with its subsidiaries, the
Company) was incorporated under the laws of the State of Delaware in 1932.
Southern Union is one of the top ten natural gas utilities in the United States,
as measured by number of customers. The Company's principal line of business is
the distribution of natural gas as a public utility through its operating
divisions principally in Texas, Missouri, Florida, Pennsylvania since November
1999, and Rhode Island and Massachusetts effective with three acquisitions
completed in September 2000 (see Acquisitions Subsequent to Year-End).

Southern Union Gas, headquartered in Austin, Texas, serves approximately 523,000
customers in Texas (including Austin, Brownsville, El Paso, Galveston,
Harlingen, McAllen and Port Arthur). Missouri Gas Energy, headquartered in
Kansas City, Missouri, serves approximately 491,000 customers in central and
western Missouri (including Kansas City, St. Joseph, Joplin and Monett). PG
Energy, headquartered in Wilkes-Barre, Pennsylvania, serves approximately
154,000 customers in northeastern and central Pennsylvania (including
Wilkes-Barre, Scranton and Williamsport). SFNG, headquartered in New Smyrna
Beach, Florida, serves approximately 5,000 customers in central Florida
(including New Smyrna Beach, Edgewater and areas of Volusia County, Florida.)
With the acquisition of Providence Energy Corporation, Valley Resources, Inc.
and Fall River Gas Company in September 2000 (collectively hereafter referred to
as the New England Division), the Company now serves approximately 286,000
customers in Rhode Island and Massachusetts (including Providence, Newport and
Cumberland, Rhode Island and Fall River, North Attleboro and Somerset,
Massachusetts.) This diverse geographic area of the Company's natural gas
distribution systems should reduce the overall sensitivity of Southern Union's
operations to weather risk and local economic conditions.

                   Pennsylvania Enterprises, Inc. Acquisition

On November 4, 1999, the Company acquired Pennsylvania Enterprises, Inc.
(hereafter referred to as the Pennsylvania Operations) for approximately 16.7
million pre-stock dividend shares of Southern Union common stock and
approximately $36 million in cash plus the assumption of approximately $115
million in long-term debt. The acquisition was accounted for using the purchase
method. The income from the acquired Pennsylvania Operations is consolidated
with the Company beginning on November 4, 1999. Thus, the results of operations
for the year ended June 30, 2000 are not comparable to prior periods. PG Energy,
the regulated gas utility within the Pennsylvania Operations, is a division of
the Company serving approximately 154,000 customers in northeastern and central
Pennsylvania. Other subsidiaries of the Company acquired in the acquisition of
the Pennsylvania Operations include PG Energy Services Inc., (Energy Services),
PEI Power Corporation (PEI Power), and Theta Land Corporation. Theta Land
Corporation, which was engaged in the sale of property for residential and
commercial development, was sold for $12.1 million in January 2000. Through
Energy Services, the Company markets a diversified range of energy-related
products and services under the name PG Energy PowerPlus, principally in
northeastern and central Pennsylvania. Through PEI Power, an exempt wholesale
generator (within the meaning of the Public Utility Holding Company Act of
1935), the Company generates and sells electricity in Pennsylvania and
surrounding states. Also included in the acquisition of the Pennsylvania
Operations was Keystone Pipeline Services, Inc. (Keystone, a wholly-owned
subsidiary of Energy Services). Keystone is engaged primarily in the
construction, maintenance and rehabilitation of natural gas distribution
pipelines. Concurrent with the acquisition, the Company decided to dispose of
Keystone and the propane operations of Energy Services; these operations are not
material to the Company.

                       Acquisitions Subsequent to Year-End

On September 20, 2000, Southern Union completed the acquisition of Valley
Resources, Inc. (Valley Resources) for approximately $125 million in cash plus
the assumption of $30 million in long-term debt. Valley Resources is engaged in
natural gas distribution operating as Valley Gas Company and Bristol and Warren
Gas Company which are now included as part of the New England Division of
Southern Union. The non-utility subsidiaries of Valley Resources are now
subsidiaries of Southern Union. Valley Resources, which is headquartered in
Cumberland, Rhode Island, provides natural gas utility service to more than
64,000 customers within a 92 square mile area in the northeastern portion of
Rhode Island that has a population of approximately 250,000 and an approximately
15 square mile area in the eastern portion of Rhode Island that has a population
of approximately 35,000. The non-utility subsidiaries rent and sell appliances,
offer a service contract program, sell liquid propane in Rhode Island and nearby
Massachusetts, and distribute as a wholesaler franchised lines to plumbing and
heating contractors. Included in the acquisition was Valley Resources' 90%
interest in Alternate Energy Corporation, which sells, installs and designs
natural gas conversion systems and facilities, is an authorized representative
of the ONSI Corporation fuel cell, holds patents for a natural gas/diesel
co-firing system and for a device to control the flow of fuel on dual-fuel
equipment.

On September 28, 2000, Southern Union completed the acquisition of Providence
Energy Corporation (ProvEnergy) for approximately $270 million in cash plus the
assumption of $90 million in long-term debt. The ProvEnergy natural gas
distribution operations are Providence Gas and North Attleboro Gas. Providence
Gas serves approximately 168,000 natural gas customers in Providence and
Newport, Rhode Island, and 23 other cities and towns in Rhode Island and
Massachusetts. North Attleboro Gas serves approximately 6,000 customers in North
Attleboro and Plainville, Massachusetts, towns adjacent to the northeastern
Rhode Island border. The ProvEnergy utility service territories encompass
approximately 760 square miles with a population of approximately 850,000. These
operations are also now included as part of the New England Division of the
Company. Subsidiaries of the Company acquired in the ProvEnergy merger are
ProvEnergy Oil Enterprises, Inc., Providence Energy Services, Inc., and
ProvEnergy Power Company, LLC. ProvEnergy Oil Enterprises, Inc. operates a fuel
oil distribution business through its subsidiary, ProvEnergy Fuels, Inc.
(ProvEnergy Fuels). ProvEnergy Fuels serves over 14,000 residential and
commercial customers in Rhode Island and Massachusetts. Providence Energy
Services, Inc., whose operations are planned to be sold, markets natural gas and
energy services throughout New England. ProvEnergy Power Company owns 50% of
Capital Center Energy Company, LLC., a joint venture formed between ProvEnergy
and ERI Services, Inc. to provide retail power.

Also on September 28, 2000, Southern Union completed the acquisition of Fall
River Gas Company (Fall River Gas) for approximately 1.5 million shares of
Southern Union common stock and approximately $27 million in cash plus
assumption of $20 million in long-term debt. Also now included as a part of the
New England Division of the Company, Fall River Gas serves approximately 48,000
customers in the city of Fall River and the towns of Somerset, Swansea and
Westport, all located in southeastern Massachusetts. Fall River Gas'
non-regulated subsidiary, Fall River Gas Appliance Company, Inc., is now a
subsidiary of Southern Union. Headquartered in Fall River, Massachusetts, Fall
River Gas Appliance Company, Inc., rents water heaters and conversion burners
(primarily for residential use) in Fall River Gas' service area.

The aforementioned acquisitions subsequent to year-end will be accounted for
under the purchase method.

     Company Operations

The Company's principal line of business is the distribution of natural gas
through its Southern Union Gas, Missouri Gas Energy, PG Energy, and SFNG
divisions, and, effective with the September 2000 acquisitions, its New England
Division. (See Acquisitions Subsequent to Year-End) . The Company's gas utility
operations are generally seasonal in nature, with a significant percentage of
its annual revenues and earnings occurring in the traditional winter heating
season. As such, the Company is a sales and market-driven energy company whose
management is committed to achieving profitable growth of its utility businesses
in an increasingly competitive business environment and partnering with
companies which complement Southern Union's existing customer service and core
utility business. Management's strategies for achieving these objectives
principally consist of: (i) promoting new sales opportunities and markets for
natural gas; (ii) enhancing financial and operating performance; (iii) expanding
the Company through development of existing utility businesses and selective
acquisition of new utility businesses; and (iv) selective investments in
complementary businesses. Management develops and continually evaluates these
strategies and their implementation by applying their experience and expertise
in analyzing the energy industry, technological advances, market opportunities
and general business trends. Each of these strategies, as implemented throughout
the Company's existing businesses, reflects the Company's commitment to its core
natural gas utility business.

The Company may consider, when appropriate and if financially practicable to
pursue, the acquisition of other utility distribution or transmission
businesses. The nature and location of any such properties, the structure of any
such acquisitions, and the method of financing any such expansion or growth will
be determined by management and the Southern Union Board of Directors. See
Management's Discussion and Analysis of Results of Operations and Financial
Condition (MD&A) -- Cautionary Statement Regarding Forward-Looking Information.

Subsidiaries of Southern Union have been established to support and expand
natural gas sales and other energy sales and to capitalize on the Company's
energy expertise. These subsidiaries market natural gas and electricity to
end-users, operate natural gas pipeline systems, generate electricity,
distribute propane and sell commercial gas air conditioning and other gas-fired
engine-driven applications. The Company distributes propane to 7,500, 2,000 and
1,000 customers in Texas, Pennsylvania and Florida, respectively. With the
subsequent acquisition of the companies in New England, the Company will now
also serve 14,000 and 3,700 fuel oil and propane customers, respectively, in
Rhode Island and Massachusetts. Additionally, certain subsidiaries own or hold
interests in real estate and other assets, which are primarily used in the
Company's utility business. Central to all of the Company's present businesses
and strategies is the sale and transportation of natural gas.

     Southern  Union  Energy  International,  Inc.  (SUEI)  and  Southern  Union
International Investments, Inc. (Investments), both wholly-owned subsidiaries of
Southern Union, participate in energy-related projects internationally.  Energia
Estrella del Sur, S. A. de C. V. (Estrella),  a wholly-owned  Mexican subsidiary
of SUEI and  Investments,  seeks to  participate in  energy-related  projects in
Mexico.  Estrella  has a 43%  equity  ownership  in a natural  gas  distribution
company,  along with other related  operations,  which  currently  serves 22,000
customers in Piedras Negras,  Mexico, across the border from Southern Union Gas'
Eagle Pass, Texas service area.

Mercado Gas Services Inc. (Mercado), a wholly-owned subsidiary of Southern
Union, markets natural gas to commercial and industrial customers. Mercado's
sales and purchasing activities are made through short-term and long-term
contracts. These contracts and business activities are not subject to direct
rate regulation.

Southern Transmission Company (STC), a wholly-owned subsidiary of Southern
Union, owns and operates 165.3 miles of intrastate pipeline that serves
commercial, industrial and utility customers in central, south and coastal
Texas.

Norteno Pipeline Company (Norteno), a wholly-owned subsidiary of Southern Union,
owns and operates interstate pipelines that serve the gas distribution
properties of Southern Union Gas and the Public Service Company of New Mexico.
Norteno also transports gas through its interstate network to the country of
Mexico for Pemex Gas y Petroquimica Basica (PEMEX).

SUPro Energy Company (SUPro), a wholly-owned subsidiary of Southern Union,
provides propane gas services to customers located principally in Austin, El
Paso and Alpine, Texas as well as Las Cruces, New Mexico and surrounding
communities.

Atlantic Gas Corporation, a wholly-owned subsidiary of Southern Union, provides
propane gas services to 1,000 customers located in and around the communities of
New Symrna Beach, Lauderhill and Dunnellon, Florida. Atlantic Gas Corporation
sold 1,193,000 and 1,348,000 gallons of propane for the year ended June 30, 2000
and 1999, respectively.

PG Energy Services Inc. (Energy Services), a wholly-owned subsidiary of Southern
Union, markets a broad array of energy and energy-related products and services
under the name PG Energy PowerPlus. Presently, PG Energy PowerPlus offers the
sale of natural gas and electricity to 17,000 residential, commercial and
industrial users primarily in central and northeastern Pennsylvania; and the
inspection, maintenance and servicing of residential and small commercial
gas-fired equipment.

PEI Power Corporation (Power Corp.), a wholly-owned subsidiary of Southern
Union, an exempt wholesale generator (within the meaning of the Public Utility
Holding Company Act of 1935), generates and sells electricity provided by a
cogeneration facility it acquired in November 1997. This 25-megawatt facility,
located in Archbald, Pennsylvania, is fueled by a combination of natural gas and
methane recovered from a nearby landfill.

     Southern Union Total Energy  Systems,  Inc., a  wholly-owned  subsidiary of
Southern  Union,  markets and sells  gas-fired  engine-driven  applications  and
related services to the industrial and commercial marketplace.

See Acquisitions Subsequent to Year-End for a description of other subsidiaries
subsequently acquired in the acquisitions of ProvEnergy, Valley Resources and
Fall River Gas.

The Company also holds investments in commercially developed real estate in
Austin, El Paso, Harlingen and Kansas City through Southern Union's wholly-owned
subsidiary, Lavaca Realty Company (Lavaca Realty). Additionally, through the
acquisition of the Pennsylvania Operations, the Company has investments in
several tracts of land, certain of which is being prepared for development,
situated in northeastern Pennsylvania, primarily Lackawanna County. Depending
upon market conditions the Company may sell certain of these investments from
time to time.

Southern Union's strategy for long-term growth includes acquiring the right
assets that will position the Company favorably in an evolving competitive
marketplace. The Pennsylvania Operations acquisition, which closed in November
1999, provides Southern Union with a strong presence in the attractive
northeastern market. In addition, the acquisitions of Fall River Gas, ProvEnergy
and Valley Resources completed subsequent to year-end have further expanded
Southern Union's territory into New England. These four acquisitions also
provide geographic and weather diversity to the Company's service areas. Within
the past several years, the Company's growth strategy also has resulted in
Southern Union expanding its gas service into Mexico in a service area adjacent
to Southern Union Gas, and Florida. Going forward, Southern Union may consider
other acquisitions which will financially enhance growth and take advantage of
future market opportunities.

The information about the Company in the remainder of Item 1 -- Business does
not include information related to Fall River Gas, ProvEnergy or Valley
Resources, the companies acquired subsequent to year-end. (See Acquisitions
Subsequent to Year-End.)

                               Company Investments

Southern Union's culture promotes independent thinking and encourages
innovation. Southern Union is involved in several strategic projects.

Over the past several years, the Company acquired an equity interest in Capstone
Turbine Corporation (Capstone). This company has developed a microturbine fueled
by natural gas or propane that produces electricity and creates less pollution
than conventional systems. The refrigerator-sized microturbine unit can
efficiently provide nearly 30 kilowatts of electricity to a small business.
Additionally, this technology is highly reliable and requires low maintenance.
The Company's cost basis in Capstone is $10,625,000. In late June 2000, Capstone
completed its initial public offering (IPO). As of June 30, 2000 and August 31,
2000, the value of the Company's investment on Capstone was $187,817,000 and
$384,753,000, respectively, based on the closing prices for Capstone shares on
those days.

Southern Union also holds a $2,586,000 equity interest in PointServe, Inc.
(PointServe) a business-to-business online scheduling solution for Internet
portals seeking to enrich the consumer value of their site, and service
industries seeking to harness the power of the Internet. Patent-pending, online
scheduling technology should enable service providers to spend less and earn
more by creating accountability of marketing dollars, increasing operational
efficiencies, and increasing customer satisfaction and loyalty. PointServe
technology is intended to allow consumers to "wait less and do more" by making
it easier to find, select and schedule a service provider.

Southern Union has a $3,000,000 equity interest in Servana.com, Inc. (Servana).
Based in Austin, Texas Servana partners with utility companies to deliver
comprehensive e-commerce solutions to the customer's home. The company is
positioning itself to become the dominant utility-based home-service portal,
leveraging the utility's brand identity and prominence in local markets. For
example, a new resident who moves to Austin, Texas and needs to establish gas
service will be able to access Southern Union's website, schedule service
through PointServe, and register for a variety of other services (i.e.,
electric, pest control, lawn service, etc.).

As of June 30, 2000, Southern Union had a $2,000,000 equity interest in Advent
Networks, Inc. (Advent), headquartered in Austin, Texas. Southern Union intends
to make an additional investment of up to approximately $2,500,000 in Advent
this Fall. Advent is developing a next generation UltraBand(TM) platform, which
is expected to deliver digital broadband services 50 times faster than digital
subscriber lines (DSL) or cable modems, and 1,000 times faster than dial-up
modems, over the "last mile". UltraBand(TM) should provide cable network
overbuilders a competitive advantage with its capability to deliver content at a
quality and speed that cannot be provided over cable modem. Beta testing of
UltraBand(TM) is expected in Spring 2001 in Missouri Gas Energy's Kansas City
service area.

     Competition

Natural gas distribution has been evolving from a highly regulated environment
to one where competition and customer choice is being promoted. The
restructuring of natural gas distribution began in the 1990's when the Federal
Energy Regulatory Commission (FERC) required interstate pipeline companies to
separate, or unbundle, the merchant function of selling natural gas from the
transportation and storage services they provide and offer those services to end
users on the same terms as local distribution companies. As a result, certain
large volume customers, primarily industrial and significant commercial
customers, have had opportunities to access alternative natural gas supplies
and, in some instances, delivery service from other pipeline systems. The
Company has offered transportation arrangements to customers who secure their
own gas supplies. These transportation arrangements, coupled with the efforts of
Southern Union's unregulated marketing subsidiaries, enable the Company to
provide competitively priced gas service to these large volume customers. In
addition, the Company has successfully used flexible rate provisions, when
needed, to retain customers who may have access to alternative energy sources.

As energy providers, Southern Union Gas, Missouri Gas Energy, PG Energy and SFNG
have historically competed with alternative energy sources, particularly
electricity and also propane, coal, natural gas liquids and other refined
products available in the Company's service areas. At present rates, the cost of
electricity to residential and commercial customers in the Company's service
areas generally is higher than the effective cost of natural gas service. There
can be no assurance, however, that future fluctuations in gas and electric costs
will not reduce the cost advantage of natural gas service. The cost of expansion
for peak load requirements of electricity in some of Southern Union Gas' and
Missouri Gas Energy's service areas has historically provided opportunities to
allow energy switching to natural gas pursuant to integrated resource planning
techniques. Electric competition has responded by offering equipment rebates and
incentive rates.

Competition between the use of fuel oils, natural gas and propane, particularly
by industrial, electric generation and agricultural customers, has also
increased due to the volatility of natural gas prices and increased marketing
efforts from various energy companies. In order to be more competitive with
certain alternate fuels in Pennsylvania, PG Energy offers an Alternate Fuel Rate
for eligible customers. This rate applies to large commercial and industrial
accounts that have the capability of using fuel oils or propane as alternate
sources of energy. Whenever the cost of such alternate fuel drops below the cost
of natural gas at PG Energy's normal tariff rates, PG Energy is permitted by the
Pennsylvania Public Utility Commission (PPUC) to lower its price to these
customers so that PG Energy can remain competitive with the alternate fuel.
However, in no instance may PG Energy sell gas under this special arrangement
for less than its average commodity cost of gas purchased during the month.
While competition between such fuels is generally more in Pennsylvania than the
Company's other service areas, this competition affects the nationwide market
for natural gas. Additionally, the general economic conditions in the Company's
service areas continue to affect certain customers and market areas, thus
impacting the results of the Company's operations.

The Company's gas distribution divisions are not currently in significant direct
competition with any other distributors of natural gas to residential and small
commercial customers within their service areas, other than in Pennsylvania. In
1999, the Commonwealth of Pennsylvania enacted the Natural Gas Choice and
Competition Act, which extended the ability to choose suppliers to small
commercial and residential customers as well. In accordance with the provisions
of the legislation, PG Energy submitted a restructuring plan to the PPUC on
August 2, 1999. This plan describes the terms and conditions, including the
tariffs, by which PG Energy proposed to offer unbundled transportation service
and the rules alternate natural gas suppliers must follow to operate on PG
Energy's distribution system. Following extensive review and negotiations by PG
Energy and various interested stakeholders, including representatives of the
PPUC, a Settlement Agreement was reached in November 1999. PG Energy filed
revised tariffs in accordance with the Settlement Agreement on February 1, 2000
for PPUC review and approval. Based upon the legislation, the Settlement
Agreement and the tariffs as filed, PG Energy does not believe any significant
amount of transition costs will be incurred and that any transition costs that
are incurred will generally be recoverable through rates or other customer
charges.

Following PPUC review, PG Energy filed final tariffs, with modifications, on
April 28, 2000. Effective April 29, 2000, all of PG Energy's customers have the
ability to select an alternate supplier of natural gas, which PG Energy will
continue to deliver through its distribution system. Customers can also choose
to remain with PG Energy as their supplier under regulated natural gas rates. In
either case, PG Energy serves as the supplier of last resort. To date, few small
commercial and residential customers have switched due to the lack of supplier
offers that provide any savings over PG Energy's current regulated gas rates.
The natural gas industry is currently experiencing higher than normal wholesale
prices for natural gas, which is preventing suppliers from offering competitive
rates. However, the number of supplier offers and the occurrence of customers
switching suppliers may likely increase as the wholesale market moderates over
time and PG Energy's regulated rates are adjusted to reflect the market.

     Gas Supply

The historically low cost of natural gas service is dependent upon the Company's
ability to contract for natural gas using favorable mixes of long-term and
short-term supply arrangements and favorable transportation contracts. The
Company has been directly acquiring its gas supplies since the mid-1980s when
interstate pipeline systems opened their systems for transportation service. The
Company has the organization, personnel and equipment necessary to dispatch and
monitor gas volumes on a daily, hourly and even a real-time basis to ensure
reliable service to customers.

The FERC required the "unbundling" of services offered by interstate pipeline
companies beginning in 1992. As a result, gas purchasing and transportation
decisions and associated risks have been shifted from the pipeline companies to
the gas distributors. The increased demands on distributors to effectively
manage their gas supply in an environment of volatile gas prices provides an
advantage to distribution companies such as Southern Union who have demonstrated
a history of contracting favorable and efficient gas supply arrangements in an
open market system.

The majority of Southern Union Gas' 2000 gas requirements for utility operations
were delivered under short- and long-term transportation contracts through five
major pipeline companies. The majority of Missouri Gas Energy's 2000 gas
requirements were delivered under short- and long-term transportation contracts
through four major pipeline companies. The majority of PG Energy's 2000 gas
requirements were delivered under short- and long-term transportation contracts
through four major pipeline companies. The majority of SFNG's 2000 gas
requirements were delivered under a management supply contract through one major
pipeline company. These contracts have various expiration dates ranging from
calendar year 2000 through 2018. Southern Union Gas also purchases significant
volumes of gas under long- and short-term arrangements with suppliers. The
amounts of such short-term purchases are contingent upon price. Southern Union
Gas, Missouri Gas Energy and SFNG all have firm supply commitments for all areas
that are supplied with gas purchased under short-term arrangements. Missouri Gas
Energy also holds contract rights to over 16 Bcf of storage capacity and PG
Energy holds contract rights to over 11 Bcf of storage capacity to assist in
meeting peak demands.

Due to the operation of purchase gas adjustment (PGA) clauses, gas purchase
costs generally do not directly affect earnings of our regulated utility
operations. However, the Company's unregulated gas marketing operations are
subject to price risk related to fixed price sales commitments that are not
matched with corresponding fixed price purchase agreements. At June 30, 2000,
the Company had fixed-price sales commitments with various customers that
provide for the delivery of approximately 1,922,201 Dekatherms of natural gas
through April 2001 at an average sales price per Dekatherm of $3.00. The Company
has exposure to the changes in gas prices related to fluctuating commodity
prices, which can impact the Company's financial position or results of
operations, either favorably or unfavorably. The Company's open positions are
actively managed, and the impact of changing prices on the Company's financial
position at a point in time is not necessarily indicative of the impact of price
movements throughout the year.

Gas sales and/or transportation contracts with interruption provisions, whereby
large volume users purchase gas with the understanding that they may be forced
to shut down or switch to alternate sources of energy at times when the gas is
needed for higher priority customers, have been utilized for load management by
Southern Union and the gas industry as a whole. In addition, during times of
special supply problems, curtailments of deliveries to customers with firm
contracts may be made in accordance with guidelines established by appropriate
federal and state regulatory agencies. There have been no supply-related
curtailments of deliveries to Southern Union Gas, Missouri Gas Energy, PG Energy
or SFNG utility sales customers during the last ten years except for one
instance relating to PG Energy in January 1997.

The Company is committed under various agreements to purchase certain quantities
of gas in the future. At June 30, 2000, the Company has purchase commitments for
certain quantities of gas at variable, market-based prices that have an annual
value of $113,666,000. The Company's purchase commitments may extend over a
period of several years depending upon when the required quantity is purchased.
The Company has purchase gas tariffs in effect for all its utility service areas
that provide for recovery of its purchase gas costs under defined methodologies.

In August 1997, the Missouri Public Service Commission (MPSC) issued an order
authorizing Missouri Gas Energy to begin making semi-annual PGAs in November and
April, instead of more frequent adjustments as previously made. Additionally,
the order authorized Missouri Gas Energy to establish an Experimental Price
Stabilization Fund for purposes of procuring natural gas financial instruments
to hedge a minimal portion of its gas purchase costs for the winter heating
season. The cost of purchasing these financial instruments and any gains derived
from such activities are passed on to the Missouri customers through the PGA.
Accordingly, there is no earnings impact as a result of the use of these
financial instruments. These procedures help stabilize the monthly heating bills
for Missouri customers. The Company believes it bears minimal risk under the
authorized transactions.

The MPSC approved a three year, experimental gas supply incentive plan for
Missouri Gas Energy effective July 1, 1996. Under the plan, the Company and
Missouri Gas Energy's customers shared in certain savings below benchmark levels
of gas costs achieved as a result of the Company's gas procurement activities.
Likewise, if natural gas was acquired above benchmark levels, both the Company
and customers shared in such costs. For the years ended June 30, 1999 and 1998,
the incentive plan achieved a reduction of overall gas costs of $6,900,000 and
$9,200,000, respectively, resulting in savings to Missouri customers of
$4,000,000 and $5,100,000, respectively. The Company recorded revenues of
$2,900,000 and $4,100,000 in 1999 and 1998, respectively, under this plan.
Missouri Gas Energy received authorization from the MPSC for a new gas supply
incentive plan that became effective August 31, 2000. Earnings under the plan
are primarily dependent on market prices for natural gas declining to certain
preauthorized levels which are now below current market prices. There is no
assurance that the Company will have an opportunity to generate earnings under
this aspect of the plan during fiscal 2001.

     Utility Regulation and Rates

The Company's rates and operations are subject to regulation by local, state and
federal authorities. In Texas, municipalities have primary jurisdiction over
natural gas rates within their respective incorporated areas. Rates in adjacent
environs and appellate matters are the responsibility of the Railroad Commission
of Texas (RRC). In Missouri, natural gas rates are established by the MPSC on a
system-wide basis. In Pennsylvania, natural gas rates for PG Energy are approved
by the PPUC on a system-wide basis. In Florida, natural gas rates are
established by the Florida Public Service Commission on a system-wide basis. The
FERC has jurisdiction over rates, facilities and services of Norteno and Power
Corp., and the RRC has jurisdiction over STC.

The Company holds non-exclusive franchises with varying expiration dates in all
incorporated communities where it is necessary to carry on its business as it is
now being conducted. Kansas City, Missouri; El Paso, Texas; Austin, Texas; Port
Arthur, Texas; and St. Joseph, Missouri are the five largest cities in which the
Company's utility customers are located. The franchises in the following cities
expire as follows: El Paso, Texas in 2030; Austin, Texas in 2006; Port Arthur,
Texas in 2013; and Kansas City, Missouri in 2010. The Company fully expects
these franchises to be renewed upon their expiration. The franchise in St.
Joseph, Missouri is perpetual.

Gas service rates are established by regulatory authorities to permit utilities
the opportunity to recover operating, administrative and financing costs, and
the opportunity to earn a reasonable return on equity. Gas costs are billed to
customers through PGA clauses which permit the Company to adjust its sales price
as the cost of purchased gas changes. This is important because the cost of
natural gas accounts for a significant portion of the Company's total expenses.
The appropriate regulatory authority must receive notice of such adjustments
prior to billing implementation.

Other than in Pennsylvania, the Company supports any service rate changes to its
regulators using a historic test year of operating results adjusted to normal
conditions and for any known and measurable revenue or expense changes. Because
the regulatory process has certain inherent time delays, rate orders may not
reflect the operating costs at the time new rates are put into effect. In
Pennsylvania, a future test year is utilized for ratemaking purposes, therefore,
there is no delay and rate orders more closely reflect the operating costs at
the time new rates are put into effect. The monthly customer bill contains a
fixed service charge, a usage charge for service to deliver gas, and a charge
for the amount of natural gas used. While the monthly fixed charge provides an
even revenue stream, the usage charge increases the Company's annual revenue and
earnings in the traditional heating load months when usage of natural gas
increases. In recent years, the majority of the Company's rate increases in
Texas have resulted in increased monthly fixed charges which help stabilize
earnings. Weather normalization clauses, in place in the City of Austin, El Paso
environs, Galveston, Port Arthur and two other service areas in Texas, also help
stabilize earnings.

On April 3, 2000, PG Energy filed an application with the PPUC seeking an
increase in its base rates designed to produce $17,900,000 in additional annual
revenues, to be effective June 2, 2000. On May 11, 2000, the PPUC suspended this
rate increase request for seven months, until January 2, 2001, in order to
investigate the reasonableness of the proposed rates. On August 30, 2000, PG
Energy and the principal parties to the base rate proceeding informed the
Administrative Law Judge (ALJ) assigned to the proceeding that a complete
settlement of the proceeding had been reached. The proposed settlement is
designed to produce $10,800,000 of additional annual revenue. The parties are
currently in the process of finalizing a Settlement Agreement and Joint Petition
for Settlement of Rate Investigation (the Settlement Petition) which will be
filed with the ALJ upon its completion. The Settlement Petition will request
PPUC approval for the rate increase to become effective on January 1, 2001. It
is not presently possible to determine what action either the ALJ or the PPUC
will ultimately take with respect to this rate increase request or the
Settlement Petition.

On October 18, 1999, Southern Union Gas filed a $1,696,000 rate increase request
for the El Paso service area with the City of El Paso. In February 2000, the
City of El Paso approved a $650,000 revenue increase, and an improved rate
design that collects a greater portion of the Company's revenue stream from the
monthly customer charge. Additionally, the City of El Paso approved a new
30-year franchise for Southern Union Gas.

On August 21, 1998, Missouri Gas Energy was notified by the MPSC of its decision
to grant a $13,300,000 annual increase to revenue effective on September 2,
1998, which is primarily earned volumetrically. The MPSC rate order reflected a
10.93% return on common equity. The rate order, however, disallowed certain
previously recorded deferred costs requiring a non-cash write-off of $2,221,000.
The Company recorded this charge to earnings in its fiscal year ended June 30,
1998. On December 8, 1998, the MPSC denied rehearing requests made by all
parties other than Missouri Gas Energy and granted a portion of Missouri Gas
Energy's rehearing request. On June 15, 2000, the MPSC ruled that it would not
rehear or reconsider its decision on one issue valued at $1,500,000. If the MPSC
adopts Missouri Gas Energy's positions on rehearing, then Missouri Gas Energy
would be authorized an additional $700,000 of base revenues increasing the
$13,300,000 initially authorized in its August 21, 1998 order to $14,000,000.
The MPSC is expected to rule on this rehearing in October 2000. The MPSC's
orders may be subject to judicial review and although certain parties may argue
for a reduction in Missouri Gas Energy's authorized base revenue increase on
judicial review, Missouri Gas Energy expects such arguments to be unsuccessful.

On April 13, 1998, Southern Union Gas filed a $2,228,000 request for a rate
increase from the city of El Paso, a request the city subsequently denied. On
April 21, 1998, the city council of El Paso voted to reduce the Company's rates
by $1,570,000 annually and to order a one-time cost of gas refund of $475,000.
On May 21, 1998, Southern Union Gas filed with the RRC an appeal of the city of
El Paso's actions to reduce the Company's rates and require a one-time cost of
gas refund. On December 21, 1998, the RRC issued its order implementing an
$884,000 one-time cost of gas refund and a $99,000 base rate reduction. The cost
of gas refund was completed in February 1999.

On January 22, 1997, Missouri Gas Energy was notified by the MPSC of its
decision to grant an $8,847,000 annual increase to revenue effective on February
1, 1997. Pursuant to a 1989 MPSC order, Missouri Gas Energy is engaged in a
major gas safety program in its service area (Missouri Safety Program). In
connection with this program, the MPSC issued an accounting authority order
(AAO) in Case No. GO-92-234 in 1994 which authorized Missouri Gas Energy to
defer depreciation expenses, property taxes and carrying costs at a rate of
10.54% on the costs incurred in the Missouri Safety Program. This AAO was
consistent with those which were issued by the MPSC from 1990 to 1993 to
Missouri Gas Energy's prior owner. The MPSC rate order of January 22, 1997,
however, retroactively reduced the carrying cost rate applied by the Company on
the expenditures incurred on the Missouri Safety Program since early 1994 to an
Allowance for Funds Used During Construction (AFUDC) rate of approximately 6%.
The Company filed an appeal of that portion of the rate order in the Missouri
State Court of Appeals, Western District. On August 18, 1998, the Missouri State
Court of Appeals denied the Company's appeal resulting in a one-time non-cash
write-off of $5,942,000 of previously recorded deferred costs which was recorded
as of June 30, 1998. The Company believes that the inconsistent treatment by the
MPSC in subsequently changing to the AFUDC rate from the previously ordered
10.54% rate constitutes retroactive ratemaking. Unfortunately, the decision by
the Missouri State Court of Appeals failed to address certain specific language
within the 1994 AAO that the Company believed prevented the MPSC from
retroactively changing the carrying cost rate. Southern Union requested transfer
to the Missouri Supreme Court, but was denied that request.

The approval of the January 31, 1994 acquisition of the Missouri properties by
the MPSC was subject to the terms of a stipulation and settlement agreement,
which, among other things, requires Missouri Gas Energy to reduce rate base by
$30,000,000 (amortized over a ten-year period on a straight-line basis) to
compensate rate payers for rate base reductions that were eliminated as a result
of the acquisition.

During the three-year period ended June 30, 2000, the Company did not file for
any other rate increases in any of its major service areas, although several
annual cost of service adjustments were filed.

In addition to the regulation of its utility and pipeline businesses, the
Company is affected by numerous other regulatory controls, including, among
others, pipeline safety requirements of the United States Department of
Transportation, safety regulations under the Occupational Safety and Health Act,
and various state and federal environmental statutes and regulations. The
Company believes that its operations are in compliance with applicable safety
and environmental statutes and regulations.

                                  Environmental

The Company is investigating the possibility that the Company or predecessor
companies may have been associated with Manufactured Gas Plant (MGP) sites in
its former service territories, principally in Arizona and New Mexico, and
present service territories in Texas, Missouri and its newly acquired service
territories in Pennsylvania. While the Company's evaluation of these Texas,
Missouri, Arizona, New Mexico and Pennsylvania MGP sites is in its preliminary
stages, it is likely that some compliance costs may be identified and become
subject to reasonable quantification. See MD&A -- Cautionary Statement Regarding
Forward-Looking Information and Commitments and Contingencies in the Notes to
the Consolidated Financial Statements.

     Investments in Real Estate

Lavaca Realty owns a commercially developed tract of land in the central
business district of Austin, Texas, containing a combined 11-story office
building, parking garage and drive-through bank (Lavaca Plaza). Approximately
52% of the office space at Lavaca Plaza is used in the Company's business while
the remainder is leased to non-affiliated entities. Lavaca Realty also owns a
two-story office building in El Paso, Texas as well as a one-story office
building in Harlingen, Texas. Other significant real estate investments held at
June 30, 2000 include 39,341 square feet of undeveloped land in McAllen, Texas
and 25,000 square feet of improved property in Kansas City, Missouri, of which
40% is occupied by Missouri Gas Energy and the remainder by a non-affiliated
entity. Additionally, through the acquisition of the Pennsylvania Operations,
the Company owns several tracts of land, certain of which is being prepared for
development, situated in northeastern Pennsylvania, primarily Lackawanna County.
Depending upon market conditions the Company may sell certain of these
investments from time to time.

Employees

As of July 31, 2000, the Company had 2,296 employees, of whom 1,757 are paid on
an hourly basis and 539 are paid on a salary basis. Of the 1,757 hourly paid
employees, 44% are represented by unions. Of those employees represented by
unions, 68% are employed by Missouri Gas Energy, 29% are employed by PG Energy
and 3% by Southern Union Gas. During fiscal 2000, the Company agreed to a
one-year contract and a three-year contract with bargaining units representing
Pennsylvania employees, which were effective on April 1, 2000 and August 1,
2000, respectively. In December 1998, the Company agreed to five-year contracts
with each bargaining-unit representing Missouri employees, which were effective
in May 1999.

From time to time the Company may be subject to labor disputes; however, such
disputes have not previously disrupted its business. The Company believes that
its relations with its employees are good.




<PAGE>



         Statistics of Principal Utility and Related Operations

The following table shows certain operating statistics of the Company's gas
distribution divisions with operations in Texas, Missouri and Pennsylvania,
which the Company owned during part or all of the year ended June 30, 2000:

                                                         Year Ended June 30,
                                                  2000         1999       1998
                                                --------    ----------  --------


Southern Union Gas:
Average number of gas sales customers served:
     Residential ............................    483,220      473,563   465,844
     Commercial .............................     31,860       30,847    29,828
     Industrial and irrigation ..............        253          258       252
     Public authorities and other ...........      2,862        2,849     2,755
                                                --------     --------  --------
         Total average customers served .....    518,195      507,517   498,679
=============================================   ========     ========  ========

Gas sales in millions of cubic feet (MMcf):
     Residential ............................     19,524       19,553    23,217
     Commercial .............................      8,677        8,539     9,425
     Industrial and irrigation ..............        969        1,082     1,208
     Public authorities and other ...........      2,377        2,266     2,752
                                                --------     --------   --------
         Gas sales billed ...................     31,547       31,440    36,602
     Net change in unbilled gas sales .......        137          175       (82)
                                                --------     --------   -------
         Total gas sales ....................     31,684       31,615    36,520
                                                ========     ========  ========


Weather:
     Degree days (a) ........................      1,516        1,576     2,118
     Percent of 30-year measure (b) .........         71%          74%       99%

Gas transported in MMcf .....................     17,472       16,668    16,535

Missouri Gas Energy:
Average number of gas sales customers served:
     Residential ............................    424,771      418,266   413,703
     Commercial .............................     58,323       57,247    57,693
     Industrial .............................        309          313       312
---------------------------------------------   --------     --------   -------

         Total average customers served .....    483,403      475,826   471,708
                                                ========     ========  ========
Gas sales in MMcf:
     Residential ............................     34,999       36,578    41,104
     Commercial .............................     15,640       16,842    18,705
     Industrial .............................        412          375       400
                                                --------    ---------  --------
         Gas sales billed ...................     51,051       53,795    60,209
     Net change in unbilled gas sales .......         37          204        35
                                                --------     --------  --------

         Total gas sales ....................     51,088       53,999    60,244
                                                ========     ========  ========
Weather:
     Degree days (a) ........................      4,176        4,438     4,723
     Percent of 30-year measure  (b) ........         80%          85%       90%

Gas transported in MMcf .....................     31,644       31,774    30,165



(a) "Degree days" are a measure of the coldness of the weather experienced. A
    degree day is equivalent to each degree that the daily mean temperature for
    a day falls below 65 degrees Fahrenheit.
(b) Information with respect to weather conditions is provided by the National
    Oceanic and Atmospheric Administration. Percentages of 30-year measure are
    computed based on the weighted average volumes of gas sales billed.


<PAGE>



                                                Eight Months
                                               Ended June 30,
                                                  2000(a)

PG Energy:
Average number of gas sales customers served:
     Residential ............................    140,019
     Commercial .............................     13,872
     Industrial .............................        209
     Public Authorities and Other ...........        314
                                                --------
         Total average customers served .....    154,414
                                                ========

Gas sales in MMcf:
     Residential ............................     14,830
     Commercial .............................      4,969
     Industrial .............................        215
     Public Authorities and Other
                                                --------
                                                     213
         Gas sales billed ...................     20,227
     Net change in unbilled gas sales .......       (314)
                                                --------
         Total gas sales ....................     19,913
                                                ========

Weather:
     Degree days (b) ........................      5,287
     Percent of 30-year measure (c) .........         92%

Gas transported in MMcf .....................     19,403




     (a)  PG  Energy  was  acquired  on  November  4,  1999.  See   Pennsylvania
Enterprises,  Inc. Acquisition.  (b) "Degree days" are a measure of the coldness
of the weather  experienced.  A degree day is equivalent to each degree that the
daily  mean  temperature  for a day  falls  below  65  degrees  Fahrenheit.  (c)
Information  with  respect to weather  conditions  is provided  by the  National
Oceanic  and  Atmospheric  Administration.  Percentages  of 30-year  measure are
computed based on the weighted average volumes of gas sales billed.




<PAGE>



     Customers.  The following table shows the number of customers served by the
Company,  through its divisions,  subsidiaries and affiliates,  as of the end of
its last three fiscal years.
<TABLE>
<CAPTION>

                                                               Gas Utility Customers as of June 30,
                                                                  2000       1999         1998
                                                               ----------  ---------   ----------
<S>     <C>    <C>    <C>    <C>    <C>    <C>

Southern Union Gas:
     Austin and other central and south Texas communities ..     183,872     175,596     173,228
     El Paso and other west Texas communities ..............     187,189     182,516     178,812
     Galveston and Port Arthur .............................      50,237      50,543      50,673
     Panhandle and north Texas communities .................      24,584      24,728      24,900
     Rio Grande Valley communities and Eagle Pass ..........      75,608      75,983      76,840
------------------------------------------------------------   ---------   ---------   ---------
                                                                 521,490     509,366     504,453
------------------------------------------------------------   ---------   ---------   ---------

Missouri Gas Energy:
     Kansas City, Missouri Metropolitan Area ...............     379,804     354,189     348,543
     St. Joseph, Joplin, Monett and others .................     104,432     122,883     121,766
------------------------------------------------------------   ---------   ---------   ---------
                                                                 484,236     477,072     470,309
------------------------------------------------------------   ---------   ---------   ---------

PG Energy ..................................................     154,399        --          --

Other (a) ..................................................      25,971      24,947     20,874

Total ......................................................   1,186,096   1,011,385    995,636
============================================================   =========   =========   =========

</TABLE>



(a)  Includes Mercado, South Florida Natural Gas, Atlantic Gas Corporation,
     SUPro Energy Services, PG Energy Services, Inc. and 43% (the Company's
     equity ownership) of the customers of a natural gas distribution company
     serving Piedras Negras, Mexico, in each case for the year-end in which the
     Company had such operations or investments.

ITEM 2.  Properties.

See Item 1, Business, for information concerning the general location and
characteristics of the important physical properties and assets of the Company.

Southern Union Gas has 9,651 miles of mains, 4,428 miles of service lines and
164 miles of transmission lines. STC and Norteno have 171 miles and 7 miles,
respectively, of transmission lines. Missouri Gas Energy has 7,709 miles of
mains, 5,004 miles of service lines and 47 miles of transmission lines. PG
Energy has 2,449 miles of mains, 1,452 miles of service lines and 9 miles of
transmission lines. SFNG has 140 miles of mains and 85 miles of service lines.
The Company considers its systems to be in good condition and well-maintained,
and it has continuing replacement programs based on historical performance and
system surveillance.

     Power Corp. owns a 25-megawatt  cogeneration facility located in Lackawanna
County,  Pennsylvania which burns methane and natural gas. Power Corp. also owns
a methane  recovery  facility at a nearby  landfill which  supplies  methane gas
burned at its cogeneration facility.

The information above does not include Fall River Gas, ProvEnergy or Valley
Resources, the companies acquired subsequent to year-end. (See Item 1 Business
-- Acquisitions Subsequent to Year-End.)

ITEM 3.  Legal Proceedings.

See Commitments and Contingencies in the Notes to Consolidated Financial
Statements for a discussion of the Company's legal proceedings. See MD&A --
Cautionary Statement Regarding Forward-Looking Information.

ITEM 4.  Submission of Matters to a Vote of Security Holders.

There were no matters submitted to a vote of security holders of Southern Union
during the quarter ended June 30, 2000.

     PART II


ITEM 5.Market for the Registrant's Common Stock and Related Stockholder Matters.

     Market Information

Southern Union's common stock is traded on the New York Stock Exchange under the
symbol "SUG". The high and low sales prices (adjusted for any stock dividends
and stock splits) for shares of Southern Union common stock since July 1, 1998
are set forth below:

                                           $/Share
                                         High     Low

     July 1 to September 15, 2000   $   20.75$   16.00

(Quarter Ended)
     June 30, 2000 ..............       17.27    14.41
     March 31, 2000 .............       18.16    12.63
     December 31, 1999 ..........       20.00    16.61
     September 30, 1999 .........       20.66    17.14

(Quarter Ended)
     June 30, 1999 ..............       20.75    16.78
     March 31, 1999 .............       22.11    15.77
     December 31, 1998 ..........       22.22    16.80
     September 30, 1998 .........       19.33    13.50

     Holders

As of August 31, 2000, there were 7,888 holders of record of Southern Union's
common stock. This number does not include persons whose shares are held of
record by a bank, brokerage house or clearing agency, but does include any such
bank, brokerage house or clearing agency that is a holder of record.

There were 49,589,799 shares of Southern Union's common stock outstanding on
August 31 2000 of which 33,547,896 shares were held by non-affiliates (i.e., not
beneficially held by directors, executive officers, their immediate family
members, or holders of 10% or more of shares outstanding).

     Dividends

Provisions in certain of Southern Union's long-term debt and its bank credit
facilities limit the payment of cash or asset dividends on capital stock. Under
the most restrictive provisions in effect, Southern Union may not declare or pay
any cash or asset dividends on its common stock or acquire or retire any of
Southern Union's common stock, unless no event of default exists and the Company
meets certain financial ratio requirements, which presently are met.

Southern Union has a policy of reinvesting its earnings in its businesses,
rather than paying cash dividends. Since 1994, Southern Union has distributed an
annual stock dividend of 5%. There have been no cash dividends on its common
stock during this period. On June 30, 2000, August 6, 1999, December 9, 1998 and
December 10, 1997, the Company distributed its annual 5% common stock dividend
to stockholders of record on June 19, 2000, July 23, 1999, November 23, 1998 and
November 21, 1997, respectively. A portion of each of the 5% stock dividends
distributed on June 30, 2000, August 6, 1999 and December 9, 1998 was
characterized as a distribution of capital due to the level of the Company's
retained earnings available for distribution as of the declaration date. On July
13, 1998, Southern Union effected a 3-for-2 stock split by distributing a 50%
stock dividend to holders of record on June 30, 1998. The Massachusetts
Department of Telecommunications and Energy order approving the Company's
acquisitions of Fall River Gas and ProvEnergy's North Attleboro Gas requires
that Southern Union cease distributing stock dividends because of a
Massachusetts law prohibition. Rhode Island law may also restrict Southern
Union's ability to distribute stock dividends, or at least require prior
regulatory approval. Southern Union intends to seek relief from or authority
under Massachusetts and Rhode Island law, including, if appropriate, legislative
action, in order to continue distributing its annual stock dividend. Although it
hopes to resolve these issues successfully prior to next summer, there can be no
assurance that Southern Union will be able to distribute any stock dividends in
the future including its next anticipated annual 5% stock dividend in summer
2001.

ITEM 6.  Selected Financial Data.
<TABLE>
<CAPTION>

                                                             As of and for the Year Ended June 30,
                                                   --------------------------------------------------------
                                                 2000(a)      1999(b)      1998(b)      1997        1996
                                                                        (Restated)
                                                      (dollars in thousands, except per share amounts)
<S>     <C>    <C>    <C>    <C>    <C>    <C>

Total operating revenues ..................   $  831,704   $  605,231   $  669,304   $  717,031   $  620,391
Earnings from continuing operations (c) ...        9,845       10,445       12,229       19,032       20,839
Earnings per common and common share
     equivalents (d) ......................          .22          .31          .37          .59          .65
Total assets ..............................    2,021,460    1,087,348    1,047,764      990,403      964,460
Common stockholders' equity ...............      734,647      301,058      296,834      267,462      245,915
Short-term debt and capital lease
     obligation ...........................        2,193        2,066        1,777          687          615
Long-term debt and capital lease
     obligation,  excluding current portion      733,774      390,931      406,407      386,157      385,394
Company-obligated mandatorily
     redeemable preferred securities of
      subsidiary trust ....................      100,000      100,000      100,000      100,000      100,000

Average customers served ..................    1,132,699      998,476      979,186      955,838      952,934

</TABLE>


(a)  The Pennsylvania Operations were acquired on November 4, 1999 and were
     accounted for as a purchase. The Pennsylvania Operations' assets were
     included in the Company's consolidated balance sheet at June 30, 2000 and
     its results of operations have been included in the Company's consolidated
     results of operations since November 4, 1999. For these reasons, the
     consolidated results of operations of the Company for the periods
     subsequent to the acquisition are not comparable to the same periods in
     prior years.
(b)  On December 31, 1997, Southern Union acquired Atlantic for 755,650
     pre-split and pre-stock dividend shares of common stock valued at
     $18,041,000 and cash of $4,436,000.
(c)  In March 2001, the Company discovered unauthorized financial derivative
     energy trading activity by a non-regulated, wholly-owned subsidiary. All
     such transactions were subsequently closed in April 2001, resulting in a
     cumulative cash expense of $191,000, net of tax. As of June 30, 2000 the
     related contracts were marked to market resulting in non-cash losses of
     $1,207,000, net of tax. As a result, the Company has restated fiscal year
     2000 financial information. See Item 7 -- Management's Discussion and
     Analysis of Results of Operations and Financial Condition. As of June 30,
     1998, Missouri Gas Energy wrote off $8,163,000 pre-tax in previously
     recorded regulatory assets as a result of announced rate orders and court
     rulings.
(d)  Earnings per share for all periods presented were computed based on the
     weighted average number of shares of common stock and common stock
     equivalents outstanding during the year adjusted for (i) the 5% stock
     dividends distributed on June 30, 2000, August 6, 1999, December 9, 1998,
     December 10, 1997 and December 10, 1996, and (ii) the 50% stock dividend
     distributed on July 13, 1998, and the 331/3% stock dividend distributed on
     March 11, 1996.



<PAGE>



     ITEM 7.  Management's  Discussion and Analysis of Results of Operations and
Financial Condition.

Overview Southern Union Company's core business is the distribution of natural
gas as a public utility through: Southern Union Gas; Missouri Gas Energy;
Atlantic Utilities, doing business as South Florida Natural Gas (SFNG); PG
Energy, acquired on November 4, 1999; and, effective with the acquisitions
subsequent to year-end of Providence Energy Corporation, Valley Resources, Inc.
and Fall River Gas Company, its New England Division. Southern Union Gas serves
523,000 customers in Texas (including Austin, Brownsville, El Paso, Galveston,
Harlingen, McAllen and Port Arthur). Missouri Gas Energy serves 491,000
customers in central and western Missouri (including Kansas City, St. Joseph,
Joplin and Monett). PG Energy serves 154,000 customers in northeastern and
central Pennsylvania (including Wilkes-Barre, Scranton and Williamsport). SFNG
serves 5,000 customers in portions of central Florida (including New Smyrna
Beach, Edgewater and areas of Volusia County, Florida). The New England Division
serves approximately 286,000 customers in Rhode Island and Massachusetts
(including Providence, Newport and Cumberland, Rhode Island, and Fall River,
North Attleboro and Somerset, Massachusetts).

On November 4, 1999, the Company acquired Pennsylvania Enterprises, Inc.
(hereafter referred to as the Pennsylvania Operations) for approximately 16.7
million pre-stock dividend shares of Southern Union common stock and
approximately $36 million in cash plus the assumption of approximately $115
million in long-term debt. The acquisition was accounted for using the purchase
method. Pennsylvania Operations' natural gas utility businesses are being
operated as the PG Energy division of the Company. Through the acquisition of
the Pennsylvania Operations, the Company acquired and now operates a subsidiary
that markets a diversified range of energy-related products and services under
the name of PG Energy PowerPlus, principally in northeastern and central
Pennsylvania. Other subsidiaries that the Company acquired in the Pennsylvania
Operations engage in non-regulated activities. The income from the acquired
Pennsylvania Operations is consolidated with the Company beginning on November
4, 1999. Thus, the results of operations for the year ended June 30, 2000 are
not comparable to prior periods.

See Other Matters -- Acquisitions Subsequent to Year-End for a discussion of
acquisitions completed after June 30, 2000.

                              Results of Operations

Net Earnings Southern Union Company's 2000 (fiscal year ended June 30) net
earnings were $9,845,000 ($.22 per common share, diluted for outstanding options
and warrants -- hereafter referred to as per share), compared with $10,445,000
($.31 per share) in 1999. The acquisition of the Pennsylvania Operations, net of
interest expense on $300,000,000 of 8.25% Senior Notes issued on November 3,
1999, contributed $4,266,000 in net earnings. Throughout fiscal year 2000, the
Company continued to experience extremely warm winter weather in all of its
service territories. In addition, the Company expended costs associated with
unsuccessful acquisition activities and related litigation. Also, during fiscal
year 2000, the Company incurred non-cash losses of $1,207,000, net of tax from
unauthorized financial derivative energy trading activity. This was partially
offset by an increase in the average number of customers served. Though weather
in the Southern Union Gas service territories during 2000 was 4% warmer than
1999, gas sales volumes in the corresponding period remained constant due to an
increase of 11,000 average number of customers served. In the Missouri service
territories weather was 6% warmer during 2000 than 1999 and gas sales volumes in
the corresponding period decreased 5%. An increase of 8,000 average number of
customers served in Missouri partially offset the decrease in gas sales volumes
in 2000. During fiscal years 2000 and 1999, the Company incurred pre-tax costs
of $10,363,000 and $3,839,000, respectively, related to an unsuccessful
acquisition effort and related litigation, impacting per share earnings by $.13
and $.07, respectively. Average common and common share equivalents outstanding
increased 33% in 2000 due to the issuance of 16,713,735 pre-stock dividend
shares of the Company's common stock on November 4, 1999 in connection with the
acquisition of the Pennsylvania Operations. The Company earned 1.9% on average
common equity in 2000.

The Company's 1999 net earnings were $10,445,000 ($.31 per share), compared with
$12,229,000 ($.37 per share) in 1998. The decrease was primarily due to the
extremely warm winter of 1998/1999, which was experienced in all of the
Company's service territories. Weather in the Southern Union Gas service
territories during 1999 was 25% warmer than 1998 while gas sales volumes in the
corresponding period decreased 13%. Weather in the Missouri service territories
during 1999 was 6% warmer than 1998 while gas sales volumes in the corresponding
period decreased 10%. A $13,300,000 annual rate increase to be earned
volumetrically was granted by the Missouri Public Service Commission (MPSC) to
Missouri Gas Energy effective as of September 2, 1998. As a result of the
volumetric nature of revenues and unusual warm weather, 1999 net earnings were
only marginally impacted by the rate increase. The decrease in net earnings for
1999 is also attributed to $3,839,000 of pre-tax costs associated with various
acquisition efforts, impacting per share earnings by $.07. Average common and
common share equivalents outstanding increased 3.2% in 1999 due to the issuance
of 755,650 pre-split and pre-stock dividend shares of the Company's common stock
on December 31, 1997 in connection with the acquisition of Atlantic Utilities
Corporation and Subsidiaries (Atlantic). The Company earned 3.5% and 4.3% on
average common equity in 1999 and 1998, respectively.

Operating Revenues Operating revenues in 2000 increased $226,473,000, or 37%, to
$831,704,000, while gas purchase and other energy costs increased $155,397,000,
or 45%, to $497,698,000.

The increase in both operating revenues and gas purchase and other energy costs
was primarily due to a 14% increase in gas sales volumes from 105,156 MMcf in
1999 to 119,778 MMcf in 2000 and by a 14% increase in the average cost of gas
from $3.23 per Mcf in 1999 to $3.67 per Mcf in 2000. The acquisition of PG
Energy contributed 19,913 MMcf of the increase while the remaining operations of
the Company resulted in a gas sales volume decrease of 5,291 MMcf. The increase
in the average cost of gas is due to increases in average spot market gas prices
throughout the Company's distribution system as a result of seasonal impacts on
demands for natural gas as well as the current competitive pricing occurring
within the entire energy industry. Additionally impacting operating revenues in
2000 was a $2,862,000 increase in gross receipt taxes primarily due to the
acquisition of the Pennsylvania Operations. Gross receipt taxes are levied on
sales revenues billed to the customers and remitted to the various taxing
authorities. Operating revenues in 2000 compared with 1999 were also impacted by
a $2,900,000 decrease in revenues under a gas supply incentive plan approved by
the MPSC in July, 1996. Under the plan, Southern Union and its Missouri
customers shared in certain savings below benchmark levels of gas costs incurred
as a result of the Company's gas procurement activities. Operating revenues were
marginally impacted by the $13,300,000 annual increase to revenues granted to
Missouri Gas Energy, effective as of September 2, 1998, as this rate increase is
primarily earned volumetrically and therefore was impacted by the warmer than
normal weather in both 2000 and 1999.

Gas purchase costs generally do not directly affect earnings since these costs
are passed on to customers pursuant to purchase gas adjustment (PGA) clauses.
Accordingly, while changes in the cost of gas may cause the Company's operating
revenues to fluctuate, net operating margin is generally not affected by
increases or decreases in the cost of gas. Increases in gas purchase costs
indirectly affect earnings as the customer's bill increases, usually resulting
in increased bad debt and collection costs being recorded by the Company.

Gas transportation volumes in 2000 increased 21,323 MMcf to 77,015 MMcf at an
average transportation rate per Mcf of $.43 compared with $.36 in 1999. PG
Energy contributed 19,403 MMcf of the increase in 2000. Transportation volumes
at Missouri Gas Energy in 2000 were relatively flat and increased from 23,918
MMcf to 25,969 MMcf in 2000 for Southern Union Gas and the Company's pipeline
subsidiaries. This increase was primarily due to a 15% increase, or 990 MMcf, in
the amount of volumes transported into Mexico by Norteno Pipeline Company
(Norteno), a subsidiary of the Company.

Operating revenues in 1999 compared with 1998 decreased $64,073,000, or 10%, to
$605,231,000, while gas purchase and other energy costs decreased $63,279,000,
or 16%, to $342,301,000.

Operating revenues and gas purchase and other energy costs in 1999 were affected
by both a reduction in gas sales volumes and decreases in the cost of gas. Gas
sales volumes decreased 9% in 1999 to 105,156 MMcf due to the significantly
warmer winter weather in the Missouri and Texas service territories. Gas sales
volumes were also impacted by a reduction in average usage per customer
throughout the Company's service territories as a result of more energy
efficient housing and appliances. The average cost of gas decreased $.26 to
$3.23 per Mcf in 1999 due to decreases in average spot market gas prices. The
average spot market price of natural gas decreased 16% to $1.88 per MMBtu in
1999. Additionally impacting operating revenues in 1999 was a $2,852,000
decrease in gross receipt taxes due to the mild weather in 1999. Operating
revenues in 1999 compared with 1998 were also impacted by a $1,200,000 decrease
in revenues under the previously discussed gas supply incentive plan. Operating
revenues were favorably impacted by the $13,300,000 annual increase to revenues
granted to Missouri Gas Energy, effective as of September 2, 1998. However, as
previously stated, the impact from this rate increase was marginal as it is
earned volumetrically.

Gas transportation volumes in 1999 decreased 3,461 MMcf to 55,692 MMcf at an
average transportation rate per Mcf of $.36 compared with $.33 in 1998.
Transportation volumes increased from 30,165 MMcf to 31,774 MMcf in 1999 for
Missouri Gas Energy and decreased from 28,988 MMcf to 23,918 MMcf in 1999 for
Southern Union Gas and the Company's pipeline subsidiaries. This decrease was
mainly caused by a 45% decrease, or 5,190 MMcf, in the amount of volumes
transported into Mexico by Norteno.

In 2000, 1999 and 1998, the gas distribution operations in Texas contributed
25%, 29% and 32%, respectively, of the Company's consolidated operating
revenues. In 2000, 1999 and 1998, the gas distribution operations in Missouri
contributed 44%, 61% and 59%, respectively, of the Company's consolidated
operating revenues. In 2000 the gas distribution operations in Pennsylvania
contributed 17% of the Company's consolidated operating revenues. Four suppliers
provided 55%, 50% and 45% of gas purchases in 2000, 1999 and 1998, respectively.

Net Operating Margin Net operating margin in 2000 (operating revenues less gas
purchase and other energy costs and revenue-related taxes) increased by
$68,214,000, compared with an increase of $2,058,000, in 1999. Operating margins
and earnings are primarily dependent upon gas sales volumes, gas service rates,
and in 2000, the timing of the acquisition of the Pennsylvania Operations. The
level of gas sales volumes is sensitive to the variability of the weather. If
normal weather had been present throughout the Company's service territories in
2000, 1999 and 1998, net operating margin would have increased by approximately
$21,214,000, $20,334,000 and $8,443,000, respectively. Texas and Missouri
accounted for 32% and 42%, respectively, of the Company's net operating margin
in 2000 and 40% and 55%, respectively, in 1999. Pennsylvania accounted for 23%
of the Company's net operating margin in 2000.

Weather Weather in the Missouri Gas Energy service territories in 2000 was 80%
of a 30-year measure, 6% warmer than in 1999. Weather in the Southern Union Gas
service territories in 2000 was 71% of a 30-year measure, 4% warmer than in
1999. Weather in the PG Energy service territories was 92% of a 30-year measure
for the eight months ended June 30, 2000. Weather in Missouri in 1999 was 85% of
a 30-year measure, 6% warmer than in 1998, while weather in Texas in 1999 was
74% of a 30-year measure, 25% warmer than in 1998.

Customers The average number of customers served in 2000, 1999 and 1998 was
1,132,699, 998,476 and 979,186, respectively. These customer totals exclude
Southern Union's 43% equity ownership in a natural gas distribution company in
Piedras Negras, Mexico which currently serves 22,000 customers. Southern Union
Gas served 518,195 customers in Texas during 2000. Missouri Gas Energy served
483,403 customers in central and western Missouri and PG Energy served 154,414
customers in northeastern and central Pennsylvania during the eight months ended
June 30, 2000. SFNG and Atlantic Gas Corporation, a propane subsidiary of the
Company, served 4,303 and 1,036 customers, respectively, during 2000. SUPro
Energy Company (SUPro), a subsidiary of the Company, served 9,274 propane
customers while PG Energy Services Inc. (Energy Services), a subsidiary of the
Company, served 19,971 electric, propane and natural gas customers during the
eight months ended June 30, 2000.

Operating Expenses Operating, maintenance and general expenses in 2000 increased
$26,894,000, or 25%, to $136,587,000. An increase of $23,804,000 was the result
of the acquisition of the Pennsylvania Operations. Increased expenses associated
with increased bad debt expense and inventory write-downs for SUPro, as well as
increases in Company employee benefit costs also contributed to the increase in
2000.

Depreciation and amortization expense in 2000 increased $13,285,000 to
$55,140,000. The increase was primarily due to the acquisition of the
Pennsylvania Operations and normal growth in plant. Taxes other than on income
and revenues, principally consisting of property, payroll and state franchise
taxes increased $2,768,000 to $17,269,000 in 2000. The increase was also
primarily the result of the acquisition of the Pennsylvania Operations.

Operating, maintenance and general expenses in 1999 increased $2,166,000, or 2%,
to $109,693,000. The increase is a result of increased expenses associated with
various claims and litigation and increases in employee benefit costs.

Depreciation and amortization expense in 1999 increased $3,416,000 to
$41,855,000 as a result of including certain costs into rate base that were
previously deferred as provided in the Missouri Gas Energy revenue increase
effective as of September 2, 1998 and normal growth in plant. Taxes other than
on income and revenues, principally consisting of property, payroll and state
franchise taxes increased $296,000 to $14,501,000 in 1999. The increase was
primarily due to increases in property taxes resulting from the inclusion of
certain plant assets pursuant to the Missouri Gas Energy Safety Program that
were previously deferred prior to the September 2, 1998 revenue increase in
Missouri. Employees The Company employed 2,285, 1,554, and 1,594 individuals as
of June 30, 2000, 1999, and 1998, respectively. After gas purchases and taxes,
employee costs and related benefits are the Company's most significant expense.
Such expense includes salaries, payroll and related taxes and employee benefits
such as health, savings, retirement and educational assistance. During fiscal
2000, the Company agreed to a one-year contract and a three-year contract with
two bargaining units representing Pennsylvania employees, which were effective
on April 1, 2000 and August 1, 2000, respectively. In December 1998, the Company
agreed to five-year contracts with each of the bargaining units representing
Missouri employees, which were effective in May 1999.

Interest Expense and Dividends on Preferred Securities Total interest expense in
2000 increased by $15,493,000, or 43%, to $51,492,000. Interest expense on
long-term debt and capital leases increased by $17,736,000 in 2000 primarily due
to the issuance of $300,000,000 of 8.25% Senior Notes on November 3, 1999,
(8.25% Senior Notes) which was used to extinguish $136,000,000 of existing debt
of the Pennsylvania Operations at the time of the merger, and the assumption of
$45,000,000 of Pennsylvania Operations' debt by the Company.

Interest expense on short-term debt in 2000 decreased $284,000 to $1,266,000
primarily due to the decrease in the average short-term debt outstanding by
$6,472,000 to $21,002,000. The average rate of interest on short-term debt
increased from 5.6% in 1999 to 6% in 2000.

Total interest expense in 1999 increased by $1,115,000, or 3%, to $35,999,000.
Interest expense on long-term debt and capital leases increased by $752,000 in
1999 primarily due to an increase of $14,984,000 in the average capital lease
obligation outstanding associated with the installation of an Automated Meter
Reading (AMR) system at Missouri Gas Energy. The installation of the AMR system
was completed during the first quarter of fiscal year 1999.

Interest expense on short-term debt in 1999 decreased $849,000 to $1,550,000 due
to the average short-term debt outstanding during 1999 decreasing $11,631,000 to
$27,474,000. The average rate of interest on short-term debt also decreased from
6.1% in 1998 to 5.6% in 1999. Interest expense incurred on PGA liabilities
increased $850,000 during 1999 due to lower than anticipated gas supply costs.

Write-Off of Regulatory Assets During 1998, the Company was impacted by pre-tax
non-cash write-offs totaling $8,163,000 of previously recorded regulatory
assets. Pursuant to a 1989 MPSC order, Missouri Gas Energy is engaged in a major
gas safety program. In connection with this program, the MPSC issued an
accounting authority order in 1994 which authorized Missouri Gas Energy to defer
carrying costs at a rate of 10.54%. The MPSC rate order of January 22, 1997,
however, retroactively reduced the 10.54% carrying cost rate used since early
1994 to an Allowance for Funds Used During Construction (AFUDC) rate of
approximately 6%. The Company filed an appeal of this portion of the rate order
in the Missouri State Court of Appeals, Western District, and on August 18, 1998
was notified that the appeal was denied. This resulted in a one-time non-cash
write-off of $5,942,000 by the Company of previously deferred costs in its
fiscal year ended June 30, 1998. See Commitments and Contingencies in the Notes
to Consolidated Financial Statements.

On August 21, 1998, Missouri Gas Energy was notified by the MPSC of its decision
to grant a $13,300,000 annual increase to revenue effective on September 2,
1998, which is primarily earned volumetrically. The MPSC rate order reflected a
10.93% return on common equity. The rate order, however, disallowed certain
previously recorded deferred costs associated with the rate filing, requiring a
non-cash write-off of $2,221,000. Though the Company has requested a rehearing
on significant portions of these disallowances, the Company recorded this charge
to earnings in its fiscal year ended June 30, 1998.

Trading Losses In March 2001, the Company discovered unauthorized financial
derivative energy trading activity by a non-regulated, wholly-owned subsidiary.
During March 2001 and April 2001, all unauthorized trading activity was closed
resulting in a cumulative cash expense of $191,000, net of tax. However, due to
certain accounting rules, such trading contracts must be recorded at fair value
as of each balance sheet date with gains and losses included in earnings. As a
result, a restatement of financial information for the fiscal year ended June
30, 2000 and the two subsequent quarters was required. This restatement resulted
in non-cash losses of $1,207,000, net of tax, for the fiscal year ended June 30,
2000; $1,726,000, net of tax, for the three-month period ended September 30,
2000; and $3,158,000, net of tax, for the three-month period ended December 31,
2000.

The Audit Committee of the Board of Directors promptly initiated an
investigation through the Company's Legal Department with the assistance of
outside counsel and independent accountants of the financial derivative trading
activities. The Company believes that the investigation has identified all
unauthorized trading transactions by the subsidiary. Certain personnel changes
have occurred at the subsidiary. Outside counsel and independent accountants
have been engaged to review the relevant policies and procedures for possible
enhancements.

Other Income (Expense), Net Other expense, net, in 2000 was $9,708,000, compared
to $1,814,000 in 1999. Other expense in 2000 included $10,363,000 of costs
associated with unsuccessful acquisition efforts and related litigation and
$2,236,000 of non-cash trading losses, previously discussed. This was partially
offset by net rental income of Lavaca Realty Company (Lavaca Realty) of
$1,757,000.

Other expense in 1999 included $3,839,000 of costs associated with various
acquisition efforts and a net expense of $619,000 related to the amortization
and current deferral of interest and other expenses associated with the Missouri
Gas Energy Safety Program. This was partially offset by net rental income of
Lavaca Realty of $1,448,000 and equity earnings of $609,000 from Southern
Union's 43% equity ownership of a natural gas distribution company in Piedras
Negras, Mexico.

Other income in 1998 included $1,671,000 in deferral of interest and other
expenses associated with the Missouri Gas Energy Safety Program; realized gains
on the sale of investment securities of $1,088,000; and net rental income of
Lavaca Realty of $1,119,000. This was partially offset by $885,000 of costs
associated with various acquisition efforts.

Federal and State Income Taxes Federal and state income tax expense in 2000,
1999, and 1998 was $9,589,000, $7,109,000 and $7,984,000, respectively. The
Company's consolidated federal and state effective income tax rate was 49%, 40%
and 39% in 2000, 1999 and 1998, respectively. The increase in the effective
federal and state income tax rate is a result of non-tax deductible amortization
of additional purchase cost.

     Liquidity and Capital Resources

Operating Activities The seasonal nature of Southern Union's business results in
a high level of cash flow needs to finance gas purchases and other energy costs,
outstanding customer accounts receivable and certain tax payments. To provide
these funds, as well as funds for its continuing construction and maintenance
programs, the Company has historically used its credit facilities along with
internally-generated funds. Because of available short-term credit and the
ability to obtain various market financing, management believes it has adequate
financial flexibility to meet its cash needs.

The Company has increased the scale of its operations and the size of its
customer base by pursuing and consummating business combination transactions. On
November 4, 1999, the Company acquired the Pennsylvania Operations and,
subsequent to year-end, the Company acquired Valley Resources, Inc. (Valley
Resources), Fall River Gas Company (Fall River Gas) and Providence Energy
Corporation (ProvEnergy). See Other Matters -- Acquisitions Subsequent to
Year-End. Acquisitions require substantial financial expenditures which may need
to be financed through cash flow from operations or future debt and equity
offerings. The availability and terms of any such financing sources will depend
upon various factors and conditions such as the Company's combined cash flow and
earnings, the Company's resulting capital structure, and conditions in financial
markets at the time of such offerings. Acquisitions and financings also affect
the Company's combined results due to factors such as the Company's ability to
realize any anticipated benefits from the acquisitions, successful integration
of new and different operations and businesses, and effects of different
regional economic and weather conditions. Future acquisitions or merger-related
refinancing may involve the issuance of shares of the Company's common stock,
which could have a dilutive effect on the then-current stockholders of the
Company. See Other Matters -- Cautionary Statement Regarding Forward-Looking
Information.

Cash flow from operating activities in 2000 decreased by $6,331,000 to
$70,522,000, and increased by $8,596,000 to $76,853,000 in 1999. Operating
activities were impacted by the timing of acquisitions, the non-cash write-off
of previously recorded regulatory assets in 1998 discussed above, the timing of
natural gas stored in inventory at Missouri Gas Energy and PG Energy and general
changes in other operating accounts.

At June 30, 2000, 1999 and 1998, the Company's primary source of liquidity
included borrowings available under the Company's credit facilities. A balance
of nil and $21,000,000 was outstanding under the credit facilities at June 30,
2000 and 1999, respectively. In May 2000, the Company amended and restated these
credit facilities. As of August 31, 2000 there was a balance of $26,320,000
outstanding under these credit facilities.

Investing Activities Cash flow used in investing activities in 2000 increased by
$73,314,000 to $154,523,000, and increased by $15,575,000 to $81,209,000 in
1999. Investing activity cash flow was primarily affected by additions to
property, plant and equipment, acquisition and sales of operations and sales and
purchases of investment securities.

During 2000, 1999 and 1998, the Company expended $100,446,000, $73,147,000 and
$77,018,000, respectively, for capital expenditures excluding acquisitions.
These expenditures primarily related to distribution system replacement and
expansion. Included in these capital expenditures were $14,286,000, $17,951,000
and $21,125,000 for the Missouri Gas Energy Safety Program in 2000, 1999 and
1998, respectively. Cash flow from operations has historically been utilized to
finance capital expenditures and is expected to be the primary source for future
capital expenditures.

On November 4, 1999, Southern Union acquired the Pennsylvania Operations for
16,713,735 pre-stock dividend shares of common stock and $36,152,000 in cash. On
the date of acquisition, Pennsylvania Operations had $576,000 in cash and cash
equivalents. In January 2000, a former subsidiary of the Pennsylvania Operations
was sold for $12,150,000. No gain or loss was recognized on this transaction. On
December 31, 1997, Southern Union acquired Atlantic for 755,650 pre-split and
pre-stock dividend shares of common stock and $4,436,000 of cash. On the date of
acquisition, Atlantic had $11,683,000 of cash and cash equivalents.

During 2000, the Company purchased investment securities of $21,001,000. In late
June 2000, Capstone Turbine Corporation (Capstone) completed its initial public
offering (IPO). As of June 30, 2000 and August 31, 2000, the value of the
Company's investment in Capstone was $187,817,000 and $384,753,000,
respectively. The Company has classified this investment as current, as it plans
to monetize its investment as soon as practicable following the completion of
the applicable lock-up periods to which it was subject in connection with the
IPO and use the proceeds to reduce outstanding debt. During 1999, the Company
purchased investment securities of $7,000,000. During 1998, the Company
purchased investment securities of $5,000,000 and had proceeds from the sale of
investment securities of $6,531,000.

The Company completed the installation of an AMR system at Missouri Gas Energy
during the first quarter of fiscal year 1999. The installation of the AMR system
involved an investment of approximately $30,000,000 which is accounted for as a
capital lease obligation. As of June 30, 2000, the capital lease obligation
outstanding was $25,104,000.

Financing Activities Cash flow from financing activities was $111,830,000 in
2000. Cash flow from financing activities was $4,356,000 in 1999, while a cash
flow used in financing activities was $2,623,000 in 1998. Financing activity
cash flow changes were primarily due to acquisition financing, repayment of
debt, net activity under the revolving credit facilities, purchase of treasury
stock and changes in cash overdrafts. As a result of these financing
transactions, the Company's total debt to total capital ratio at June 30, 2000
was 46.8%, compared with 49.0% and 50.6% at June 30, 1999 and 1998,
respectively. The Company's effective debt cost rate under the current debt
structure is 8.03% (which includes interest and the amortization of debt
issuance costs and redemption premiums on refinanced debt).

In connection with the acquisition of the Pennsylvania Operations, the Company
issued $300,000,000 of 8.25% Senior Notes due 2029 which were used to: (i) fund
the cash portion of the consideration to be paid to the Pennsylvania Operations
shareholders; (ii) refinance and repay certain debt of Pennsylvania Operations,
and (iii) repay outstanding borrowings under the Company's various credit
facilities. These senior notes are senior unsecured obligations and will rank
equally in right of payment with each other and with the Company's other
unsecured and unsubordinated obligations, including the 7.60% Senior Notes due
2024. In connection with the acquisition of the Pennsylvania Operations, the
Company assumed $30,000,000 of 8.375% Series First Mortgage Bonds due in
December 2002 and $15,000,000 of 9.34% Series First Mortgage Bonds due in 2019.

On August 28, 2000 the Company entered into a short-term bank note (the Term
Note) to fund (i) the cash portion of the consideration to be paid to the Fall
River Gas' stockholders, (ii) the all cash consideration to be paid to the
ProvEnergy and Valley Resources stockholders, and (iii) all related acquisition
costs and refinancing of debt done in connection with these mergers. In
September 2000, draws totaling $480,000,000 were made under this Term Note.
Remaining commitments under the Term Note are $95,000,000 as of September 28,
2000 to cover any trailing costs. The Term Note expires August 21, 2001 but may
be extended at the Company's option through August 26, 2002 for a 12.5 basis
point fee. The interest rate on borrowings under the Term Note is a floating
rate based on LIBOR or prime interest rates. See Quantitative and Qualification
Disclosures About Market Risk. In connection with the acquisitions subsequent to
year-end, the Company will assume all these companies' long-term debt
outstanding except for approximately $20,000,000 outstanding of Valley
Resources' 8% First Mortgage Bonds.

In fiscal year 2001, the Company may choose or need to refinance some portion or
all of the short-term bank note. Sources of future or alternative financing that
the Company may consider include commercial and investment banks, institutional
lenders, institutional investors and public securities markets. The availability
and terms of any such financing sources will depend upon various factors and
conditions such as the Company's combined cash flow and earnings, the Company's
resulting capital structure, and conditions in financial markets at the time of
such offerings. Acquisitions and financings will also affect the Company's
combined results due to factors such as the Company's ability to realize any
anticipated benefits from the mergers and any other acquisitions, successful
integration of new and different operations and businesses, and effects of
different regional economic and weather conditions. See Other Matters --
Cautionary Statement Regarding Forward-Looking Information.

Southern Union Financing I, a consolidated wholly-owned subsidiary of Southern
Union, issued $100,000,000 of Preferred Securities in May 1995. The issuance of
the Preferred Securities was part of a $300,000,000 shelf registration filed
with the Securities and Exchange Commission on March 29, 1995. Southern Union
may sell a combination of preferred securities of financing trusts and senior
and subordinated debt securities of Southern Union of up to $196,907,200 (the
remaining shelf) from time to time, at prices determined at the time of any
offering.

In June 1999, the Company repurchased $20,000,000 of Senior Notes. Depending
upon market conditions and available cash balances, the Company may repurchase
additional debt securities in the future. See Preferred Securities of Subsidiary
Trust and Debt and Capital Lease in the Notes to the Consolidated Financial
Statements.

On May 31, 2000, the Company restated and amended its short-term and long-term
credit facilities (together referred to as Revolving Credit Facilities). The
Company has available $90,000,000 under the short-term facility, which expires
May 30, 2001, and $135,000,000 under the long-term facility, which expires on
May 31, 2003. The Company has additional availability under uncommitted line of
credit facilities (Uncommitted Facilities) with various banks. Borrowings under
the facilities are available for Southern Union's working capital, letter of
credit requirements and other general corporate purposes. The Revolving Credit
Facility is subject to a commitment fee based on the rating of the Senior Notes.
As of June 30, 2000, the commitment fee was an annualized 0.14%.

The Company had standby letters of credit outstanding of $6,199,000 at June 30,
2000 and $1,622,000 at June 30, 1999, which guarantee payment of various
insurance premiums and state taxes.

           Quantitative and Qualitative Disclosures About Market Risk

The Company has long-term debt, Preferred Securities and Revolving Credit
Facilities, which subject the Company to the risk of loss associated with
movements in market interest rates.

At June 30, 2000, the Company had issued fixed-rate long-term debt, capital
lease and Preferred Securities aggregating $835,967,000 in principal amount and
having a fair value of $800,934,000. These instruments are fixed-rate and,
therefore, do not expose the Company to the risk of earnings loss due to changes
in market interest rates. However, the fair value of these instruments would
increase by approximately $42,660,000 if interest and dividend rates were to
decline by 10% from their levels at June 30, 2000. In general, such an increase
in fair value would impact earnings and cash flows only if the Company were to
reacquire all or a portion of these instruments in the open market prior to
their maturity.

The Company presently has no balance outstanding under its Revolving Credit
Facilities. The floating-rate obligations under the Revolving Credit Facilities
expose the Company to the risk of increased interest expense in the event of
increases in short-term interest rates. In connection with the acquisitions
subsequent to year-end, the Company entered into the Term Note, as discussed
above. At September 28, 2000, the Term Note has a balance outstanding of
approximately $480,000,000. The floating rate obligations under the Term Note
expose the Company to risk of increased interest expense in the event of
increases in short-term interest rates. If the floating rates were to increase
by 10% from September 28, 2000 levels, the Company's consolidated interest
expense would increase by a total of approximately $300,000 each month in which
such increase continued.

The risk of an economic loss is mitigated at this time as a result of the
Company's regulated status. Any unrealized gains or losses are accounted for in
accordance with the Financial Accounting Standards Board Accounting for the
Effects of Certain Types of Regulation as a regulatory asset/liability because
the Company believes that its future contributions which are currently recovered
through the rate-making process will be adjusted for these gains and losses.

The change in exposure to loss in earnings and cash flow related to interest
rate risk from June 30, 1999 to June 30, 2000 is not material to the Company.

See Preferred Securities of Subsidiary Trust and Debt and Capital Lease in the
Notes to the Consolidated Financial Statements.

The Company owns approximately 4.2 million shares of Capstone common stock. This
investment is classified as "available for sale" under the Financial Accounting
Standards Board Accounting for Certain Investments in Debt and Equity
Securities. Unrealized gains and losses resulting from changes in the market
value of Capstone are recorded in Other Comprehensive Income. The Capstone
investment exposes the Company to losses in the fair value of Capstone common
stock. A 10% decline in the market value per share of Capstone common stock from
the June 30, 2000 levels would result in an $18,800,000 loss in value to the
Company.

Due to the operation of purchase gas adjustment clauses, gas purchase costs
generally do not directly affect earnings of our regulated utility operations.
However, the Company's unregulated gas marketing operations are subject to price
risk related to fixed-price sales commitments that are not matched with
corresponding fixed-price purchase agreements. At June 30, 2000, the Company had
fixed-price sales commitments with various customers that provide for the
delivery of approximately 1,922,201 Dekatherms of natural gas through April 2001
at an average sales price per Dekatherm of $3.00. The Company has exposure to
the changes in gas prices related to fluctuating commodity prices, which can
impact the Company's financial position or results of operations, either
favorably or unfavorably. The Company's open positions are actively managed, and
the impact of changing prices on the Company's financial position at a point in
time is not necessarily indicative of the impact of price movements throughout
the year.

As a result of the unauthorized financial derivative energy trading activity, an
open contract of a non-regulated, wholly-owned subsidiary was present at June
30, 2000 for 10,000 MMBtu's of natural gas per day for the contract period of
January 2001 to December 2001 at a fixed price of $2.72 per MMBtu. During the
contract period, such subsidiary would receive funds if the respective monthly
price of natural gas falls below $2.72 and will be required to pay for any
amount over $2.72 per MMBtu. The Company has exposure to the changes in gas
prices related to fluctuating commodity prices, which can impact the Company's
financial position or results of operations, either favorably or unfavorably. A
10% increase in natural gas commodity prices from June 30, 2000 levels would
result in a $1,300,000 loss to the Company.

In connection with the acquisition of the Pennsylvania Operations, the Company
assumed a guaranty with a bank whereby the Company unconditionally guaranteed
payment of financing obtained for the development of PEI Power Park. In March
1999, the Borough of Archbald, the County of Lackawanna, and the Valley View
School District (together the Taxing Authorities) approved a Tax Incremental
Financing Plan (TIF Plan) for the development of PEI Power Park. The TIF Plan
requires that: (i) the Redevelopment Authority of Lackawanna County raise
$10,600,000 of funds to be used for infrastructure improvements of the PEI Power
Park; (ii) the Taxing Authorities create a tax increment district and use the
incremental tax revenues generated from new development to service the
$10,600,000 debt; and (iii) PEI Power Corporation, a subsidiary of the Company,
guarantee the debt service payments. In May 1999, the Redevelopment Authority of
Lackawanna County borrowed $10,600,000 from a bank under a promissory note (TIF
Debt). The TIF Debt has a 12-year term, with a 7.75% annual interest rate, and
requires semi-annual principal and interest payments of approximately $725,000
(interest only for the first year). As of June 30, 2000, incremental tax
revenues cover approximately 17% of the annual debt service. The balance
outstanding on the TIF Debt was $9,805,000 as of June 30, 2000.


<PAGE>



         Other Matters

Acquisitions Subsequent to Year-End On September 20, 2000, Southern Union
completed the acquisition of Valley Resources for approximately $125 million in
cash plus the assumption of $30 million in long-term debt. Valley Resources is
engaged in natural gas distribution operating as Valley Gas Company and Bristol
and Warren Gas Company which are now included as part of the New England
Division of Southern Union. The non-utility subsidiaries of Valley Resources are
now subsidiaries of Southern Union. Valley Resources, which is headquartered in
Cumberland, Rhode Island, provides natural gas utility service to more than
64,000 customers within a 92 square mile area in the northeastern portion of
Rhode Island that has a population of approximately 250,000 and an approximately
15 square mile area in the eastern portion of Rhode Island that has a population
of approximately 35,000. The non-utility subsidiaries rent and sell appliances,
offer a service contract program, sell liquid propane in Rhode Island and nearby
Massachusetts, and distribute as a wholesaler franchised lines to plumbing and
heating contractors. Included in the acquisition was Valley Resources' 90%
interest in Alternate Energy Corporation, which sells, installs and designs
natural gas conversion systems and facilities, is an authorized representative
of the ONSI Corporation fuel cell, holds patents for a natural gas/diesel
co-firing system and for a device to control the flow of fuel on dual-fuel
equipment.

On September 28, 2000, Southern Union completed the acquisition of ProvEnergy
for approximately $270 million in cash plus the assumption of $90 million in
long-term debt. The ProvEnergy natural gas distribution operations are
Providence Gas and North Attleboro Gas. Providence Gas serves approximately
168,000 natural gas customers in Providence and Newport, Rhode Island, and 23
other cities and towns in Rhode Island and Massachusetts. North Attleboro Gas
serves approximately 6,000 customers in North Attleboro and Plainville,
Massachusetts, towns adjacent to the northeastern Rhode Island border. The
ProvEnergy utility service territories encompass approximately 760 square miles
with a population of approximately 850,000. These operations are also now
included as part of the New England Division of the Company. Subsidiaries of the
Company acquired in the ProvEnergy merger are ProvEnergy Oil Enterprises, Inc.,
Providence Energy Services, Inc., and ProvEnergy Power Company, LLC. ProvEnergy
Oil Enterprises, Inc. operates a fuel oil distribution business through its
subsidiary, ProvEnergy Fuels, Inc. (ProvEnergy Fuels). ProvEnergy Fuels serves
over 14,000 residential and commercial customers in Rhode Island and
Massachusetts. Providence Energy Services, Inc., whose operations are planned to
be sold, markets natural gas and energy services throughout New England.
ProvEnergy Power Company owns 50% of Capital Center Energy Company, LLC., a
joint venture formed between ProvEnergy and ERI Services, Inc. to provide retail
power.

Also on September 28, 2000, Southern Union completed the acquisition of Fall
River Gas for approximately 1.5 million shares of Southern Union common stock
and approximately $27 million in cash plus assumption of $20 million in
long-term debt. Also now included as a part of the New England Division of the
Company, Fall River Gas serves approximately 48,000 customers in the city of
Fall River and the towns of Somerset, Swansea and Westport, all located in
southeastern Massachusetts. Fall River Gas' non-regulated subsidiary, Fall River
Gas Appliance Company, Inc., is now a subsidiary of Southern Union.
Headquartered in Fall River, Massachusetts, Fall River Gas Appliance Company,
Inc., rents water heaters and conversion burners (primarily for residential use)
in Fall River Gas' service area.

The aforementioned acquisitions subsequent to year-end will be accounted for
under the purchase method.

     Foreign  Operations On July 23, 1997, Energia Estrella del Sur, S. A. de C.
V., a wholly-owned  subsidiary of Southern Union Energy International,  Inc. and
Southern  Union  International  Investments,  Inc.,  both  subsidiaries  of  the
Company,  acquired an equity ownership in a natural gas distribution company and
other  operations  which  currently  serves 22,000  customers in Piedras Negras,
Mexico,  which is across the border from the Company's Eagle Pass, Texas service
area.  Southern  Union  currently  has a 43% equity  ownership in this  company.
Financial results of foreign operations did not have a significant impact on the
Company's financial results during 2000, 1999 and 1998.

Stock Splits and Dividends On June 30, 2000, August 6, 1999 and December 9,
1998, Southern Union distributed a 5% common stock dividend to stockholders of
record on June 19, 2000, July 23, 1999 and November 23, 1998. A portion of each
of these 5% stock dividends was characterized as a distribution of capital due
to the level of the Company's retained earnings available for distribution as of
the declaration date. Additionally, Southern Union distributed an annual 5%
common stock dividend on December 10, 1997. On July 13, 1998, a three-for-two
stock split was distributed in the form of a 50% stock dividend. Unless
otherwise stated, all per share data included herein and in the accompanying
Consolidated Financial Statements and Notes thereto have been restated to give
effect to the stock split and stock dividends.

Contingencies The Company is investigating the possibility that the Company or
predecessor companies may have been associated with Manufactured Gas Plant (MGP)
sites in its former service territories, principally in Arizona and New Mexico,
and present service territories in Texas, Missouri and its newly acquired
service territories in Pennsylvania. While the Company's evaluation of these
Texas, Missouri, Arizona, New Mexico and Pennsylvania MGP sites is in its
preliminary stages, it is likely that some compliance costs may be identified
and become subject to reasonable quantification. Certain MGP sites located
within the Company's service territories are currently the subjects of
governmental actions.

On February 1, 1999, Southern Union submitted a proposal to the Board of
Directors of Southwest Gas Corporation (Southwest) to acquire all of Southwest's
outstanding common stock for $32.00 per share. Southwest then had a pending
merger agreement with ONEOK, Inc. (ONEOK) at $28.50 per share. On February 22,
1999, Southern Union and Southwest both publicly announced Southern Union's
proposal, after the Southwest Board of Directors determined that Southern
Union's proposal was a Superior Proposal (as defined in the Southwest merger
agreement with ONEOK). At that time Southern Union entered into a
Confidentiality and Standstill Agreement with Southwest at Southwest's
insistence. (This agreement expired on its own terms in August 2000.) On April
25, 1999, Southwest's Board of Directors rejected Southern Union's $32.00 per
share offer and accepted an amended offer of $30.00 per share from ONEOK. On
April 27, 1999, Southern Union increased its offer to $33.50 per share and
agreed to pay interest which, together with dividends, would provide Southwest
shareholders with a 6% annual rate of return on its $33.50 offer, commencing
February 15, 2000, until closing. According to public statements by Southwest,
Southern Union's revised proposal was also rejected by Southwest's Board of
Directors. On January 21, 2000, ONEOK terminated its agreement to merge with
Southwest.

There are several lawsuits pending that relate to activities surrounding
Southern Union's efforts to acquire Southwest. In addition, there is before the
U. S. Court of Appeals for the Tenth Circuit, an appeal by Southern Union of a
preliminary injunction entered by the U. S. District Court for the Northern
District of Oklahoma. Southern Union intends to pursue vigorously pursue its
claims against Southwest, ONEOK, and certain individual defendants, and defend
itself vigorously against the claims by Southwest and ONEOK. See Commitments and
Contingencies in the Notes to Consolidated Financial Statements for a discussion
of these lawsuits.

In August 1998, a jury in Edinburg, Texas concluded deliberations on the City of
Edinburg's franchise fee lawsuit against PG&E Gas Transmission, Texas
Corporation (formerly Valero Energy Corporation (Valero)) and a number of its
subsidiaries, as well as former Valero subsidiary Rio Grande Valley Gas Company
(RGV) and RGV's successor company, Southern Union Company. The case, based upon
events that occurred between 1985-1987, centers on specific contractual language
in the 1985 franchise agreement between RGV and the City of Edinburg. Southern
Union purchased RGV from Valero in October 1993. The jury awarded the plaintiff
damages, against all defendants under several largely overlapping but mutually
exclusive claims, totaling approximately $13,000,000. The trial judge
subsequently reduced the award to approximately $700,000 against Southern Union
and $7,800,000 against Valero and Southern Union together. The Company is
pursuing reversal on appeal. The Company believes it will ultimately prevail,
and that the outcome of this matter will not have a material adverse impact on
the Company's results of operations, financial position or cash flows.
Furthermore, the Company has not determined what impact, if any, this jury
decision may have on other city franchises in Texas.

Southern Union and its subsidiaries are parties to other legal proceedings that
management considers to be normal actions to which an enterprise of its size and
nature might be subject, and not to be material to the Company's overall
business or financial condition, results of operations or cash flows.

     See Commitments and  Contingencies  in the Notes to Consolidated  Financial
Statements.

Inflation The Company believes that inflation has caused and will continue to
cause increases in certain operating expenses and has required and will continue
to require assets to be replaced at higher costs. The Company continually
reviews the adequacy of its gas service rates in relation to the increasing cost
of providing service and the inherent regulatory lag in adjusting those rates.

Regulatory The majority of the Company's business activities are subject to
various regulatory authorities. The Company's financial condition and results of
operations have been and will continue to be dependent upon the receipt of
adequate and timely adjustments in rates. Gas service rates, which consist of a
monthly fixed charge and a gas usage charge, are established by regulatory
authorities and are intended to permit utilities the opportunity to recover
operating, administrative and financing costs and to have the opportunity to
earn a reasonable return on equity. The monthly fixed charge provides a base
revenue stream while the usage charge increases the Company's revenues and
earnings in colder weather when natural gas usage increases.

On April 3, 2000, PG Energy filed an application with the Pennsylvania Public
Utility Commission (PPUC) seeking an increase in its base rates designed to
produce $17,900,000 in additional annual revenues, to be effective June 2, 2000.
On May 11, 2000, the PPUC suspended this rate increase request for seven months,
until January 2, 2001, in order to investigate the reasonableness of the
proposed rates. On August 30, 2000, PG Energy and the principal parties to the
base rate proceeding informed the Administrative Law Judge (ALJ) assigned to the
proceeding that a complete settlement of the proceeding had been reached. The
proposed settlement is designed to produce $10,800,000 of additional annual
revenue. The parties are currently in the process of finalizing a Settlement
Agreement and Joint Petition for Settlement of Rate Investigation (the
Settlement Petition) which will be filed with the ALJ upon its completion. The
Settlement Petition will request PPUC approval for the rate increase to become
effective on January 1, 2001. It is not presently possible to determine what
action either the ALJ or the PPUC will ultimately take with respect to this rate
increase request or the Settlement Petition.

On October 18, 1999, Southern Union Gas filed a $1,696,000 rate increase request
for the El Paso service area with the City of El Paso. In February 2000, the
City of El Paso approved a $650,000 revenue increase, and an improved rate
design that collects a greater portion of the Company's revenue stream from the
monthly customer charge. Additionally, the City of El Paso approved a new
30-year franchise for Southern Union Gas.

On August 21, 1998, Missouri Gas Energy was notified by the MPSC of its decision
to grant a $13,300,000 annual increase to revenue effective on September 2,
1998, which is primarily earned volumetrically. The MPSC rate order reflected a
10.93% return on common equity. The rate order, however, disallowed certain
previously recorded deferred costs requiring a non-cash write-off of $2,221,000.
The Company recorded this charge to earnings in its fiscal year ended June 30,
1998. On December 8, 1998, the MPSC denied rehearing requests made by all
parties other than Missouri Gas Energy and granted a portion of Missouri Gas
Energy's rehearing request. On June 15, 2000, the MPSC ruled that it would not
rehear or reconsider its decision on one issue valued at $1,500,000. If the MPSC
adopts Missouri Gas Energy's positions on rehearing, then Missouri Gas Energy
would be authorized an additional $700,000 of base revenues increasing the
$13,300,000 initially authorized in its August 21, 1998 order to $14,000,000.
The MPSC is expected to rule on this rehearing in October 2000. The MPSC's
orders may be subject to judicial review and although certain parties may argue
for a reduction in Missouri Gas Energy's authorized base revenue increase on
judicial review, Missouri Gas Energy expects such arguments to be unsuccessful.

On April 13, 1998, Southern Union Gas filed a $2,228,000 request for a rate
increase from the city of El Paso, a request the city subsequently denied. On
April 21, 1998, the city council of El Paso voted to reduce the Company's rates
by $1,570,000 annually and to order a one-time cost of gas refund of $475,000.
On May 21, 1998, Southern Union Gas filed with the RRC an appeal of the city of
El Paso's actions to reduce the Company's rates and require a one-time cost of
gas refund. On December 21, 1998, the RRC issued its order implementing an
$884,000 one-time cost of gas refund and a $99,000 base rate reduction. The cost
of gas refund was completed in February 1999.

Pursuant to a 1989 MPSC order, Missouri Gas Energy is engaged in a major gas
safety program in its service territories. This program includes replacement of
company- and customer-owned gas service and yard lines, the movement and
resetting of meters, the replacement of cast iron mains and the replacement and
cathodic protection of bare steel mains. In recognition of the significant
capital expenditures associated with this safety program, the MPSC permits the
deferral, and subsequent recovery through rates, of depreciation expense,
property taxes and associated carrying costs. The continuation of the Missouri
Gas Energy Safety Program will result in significant levels of future capital
expenditures. The Company estimates incurring capital expenditures of
$15,631,000 in fiscal 2001 related to this program which are expected to be
financed through cash flow from operations. See Utility Regulation and Rates and
Commitments and Contingencies in the Notes to Consolidated Financial Statements.

In August 1997, the MPSC issued an order authorizing Missouri Gas Energy to
begin making semi-annual purchase gas adjustments (PGA) in November and April,
instead of more frequent adjustments as previously made. Additionally, the order
authorized Missouri Gas Energy to establish an Experimental Price Stabilization
Fund for purposes of procuring natural gas financial instruments to hedge a
minimal portion of its gas purchase costs for the winter heating season. The
cost of purchasing these financial instruments and any gains derived from such
activities are passed on to the Missouri customers through the PGA. Accordingly,
there is no earnings impact as a result of the use of these financial
instruments. These procedures help stabilize the monthly heating bills for
Missouri customers. The Company believes it bears minimal risk under the
authorized transactions.

The MPSC approved a three year, experimental gas supply incentive plan for
Missouri Gas Energy effective July 1, 1996. Under the plan, the Company and
Missouri Gas Energy's customers shared in certain savings below benchmark levels
of gas costs achieved as a result of the Company's gas procurement activities.
Likewise, if natural gas was acquired above benchmark levels, both the Company
and customers shared in such costs. For the years ended June 30, 1999 and 1998,
the incentive plan achieved a reduction of overall gas costs of $6,900,000 and
$9,200,000, respectively, resulting in savings to Missouri customers of
$4,000,000 and $5,100,000, respectively. The Company recorded revenues of
$2,900,000 and $4,100,000 in 1999 and 1998, respectively, under this plan.
Missouri Gas Energy received authorization from the MPSC for a new gas supply
incentive plan that became effective August 31, 2000. Earnings under the plan
are primarily dependent on market prices for natural gas declining to certain
preauthorized levels which are now below current market prices. There is no
assurance that the Company will have an opportunity to generate earnings under
this aspect of the plan during fiscal 2001.

The Company is continuing to pursue certain changes to rates and rate structures
that are intended to reduce the sensitivity of earnings to weather including
weather normalization clauses and higher monthly fixed service charges. Southern
Union Gas has weather normalization clauses in the City of Austin, El Paso
environs, Port Arthur, Galveston and in two other service areas in Texas. These
clauses allow for the adjustments that help stabilize customers' monthly bills
and the Company's earnings from the varying effects of weather.

Year 2000 The Company did not experience any significant malfunctions or errors
in its operating or business systems when the date changed from 1999 to 2000.
Based on operations since January 1, 2000, the Company does not expect any
significant impact to its ongoing business as a result of the Year 2000 problem.
The Year 2000 problem is the inability of computer application software programs
to distinguish between the year 1900 and 2000 due to a commonly-used programming
convention. Unless such programs were modified or replaced prior to 2000,
calculations and interpretations based on date-based arithmetic or logical
operations performed by such programs may have been incorrect.

It is possible that the full impact of the date change has not been fully
recognized. The Company believes that any such problems are not likely. In
addition, the Company could still be negatively affected if its customers or
suppliers are adversely affected by the Year 2000 or similar issues. The Company
currently is not aware of any significant Year 2000 or similar problems that
have arisen for its customers and suppliers.

The Company incurred costs of approximately $2,922,000 to complete this project.
The Company also expects to spend approximately $1,500,000 in equipment leasing
expenses that will be incurred over the life of the equipment that were incurred
in order to be Year 2000 compliant.

Accounting Pronouncements In June 1998, the Financial Accounting Standards Board
(FASB) issued Accounting for Derivative Instruments and Hedging Activities. The
Statement, as amended, is effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000; the Company as required will adopt the Statement
on July 1, 2000. The Statement requires that all derivative instruments be
recorded on the balance sheet at fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part of a hedge
transaction and, if it is, depending on the type of hedge transaction. During
the Company's implementation procedures, the Company identified a fair value
hedge, cash flow hedges and gas purchase contracts that are considered
derivatives under the Statement. Based on the Company's risk exposure, the
Company does not anticipate a material effect on its financial position, results
of operations or cash flows resulting from counterparty non-performance.

The Company entered into an interest rate swap to reduce exposure to changes in
fair value of fixed interest payments related to a lease commitment. For
fair-value hedge transactions in which the Company is hedging changes in an
asset's, liability's or firm commitment's fair value, changes in the fair value
of the derivative instrument will generally be offset in the income statement by
changes in the hedged item's fair value. The Company estimates that the
transition adjustment related to the fair value hedge will be immaterial to the
financial statements.

The Company is party to two interest rate swaps designed to hedge exposure to
variability in cash flows from interest rate changes on variable rate debt. For
cash flow hedges related to a variable-rate asset, liability or a forecasted
transaction, changes in the fair value attributed to the effective portion of
the derivative instrument will be reported in other comprehensive income. The
gains and losses on the derivative instrument that are reported in other
comprehensive income will be reclassified as earnings in the periods in which
earnings are impacted by the variability of the cash flows of the hedged item.
The ineffective portion of all hedges will be recognized in current-period
earnings. The Company estimates that it will record a net-of-tax
cumulative-effect-type adjustment of $960,000 gain in accumulated other
comprehensive income to recognize at fair value all derivative instruments that
will be designated as cash flow hedging instruments.

The Company's assessment also identified two gas purchase contracts at its
recently acquired PG Energy Division that have been determined to be derivatives
that do not qualify for hedge accounting treatment under the Statement. The
Company estimates that it will record a net-of-tax cumulative effect-type
adjustment of $700,000 gain in earnings to recognize the fair value of the
derivative instruments that do not qualify for hedge accounting treatment under
the Statement. These derivatives will be reflected at quoted or estimated market
value with resulting gains and losses included in operating income in the
Consolidated Statement of Income.

Energy trading contracts entered into for speculative purposes are recorded at
fair value as of each balance sheet date with gains and losses included in
earnings.

In December 1999, the Securities Exchange Commission staff issued a Staff
Accounting Bulletin, Revenue Recognition, which provides guidance on the
recognition and disclosure of revenues. Implementation of this Staff Accounting
Bulletin is required by the fourth quarter of 2001 and will have no effect on
the Company's Consolidated Financial Statements.

See the Notes to Consolidated Financial Statements for other accounting
pronouncements followed by the Company.

Cautionary Statement Regarding Forward-Looking Information This Management's
Discussion and Analysis of Results of Operations and Financial Condition and
other sections of this Annual Report on Form 10-K/A contain forward-looking
statements that are based on current expectations, estimates and projections
about the industry in which the Company operates, management's beliefs and
assumptions made by management. Words such as "expects," "anticipates,"
"intends," "plans," "believes," "seeks," "estimates," variations of such words
and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and
involve certain risks, uncertainties and assumptions, which are difficult to
predict and many of which are outside the Company's control. Therefore, actual
outcomes and results may differ materially from what is expressed or forecasted
in such forward-looking statements. The Company undertakes no obligation to
update publicly any forward-looking statements, whether as a result of new
information, future events or otherwise. Readers are cautioned not to put undue
reliance on such forward-looking statements. Stockholders may review the
Company's reports filed in the future with the Securities and Exchange
Commission for more current descriptions of developments that could cause actual
results to differ materially from such forward-looking statements.

Factors that could cause or contribute to actual results differing materially
from such forward-looking statements include the following: cost of commodity
prices; gas sales volumes; weather conditions in the Company's service
territories; the achievement of operating efficiencies and the purchases and
implementation of new technologies for attaining such efficiencies; impact of
relations with labor unions of bargaining-unit employees; the receipt of timely
and adequate rate relief; the outcome of pending and future litigation;
governmental regulations and proceedings affecting or involving the Company;
unanticipated environmental liabilities; changes in business strategy; the risk
that the businesses acquired and any other businesses or investments that
Southern Union has acquired or may acquire may not be successfully integrated
with the businesses of Southern Union; and the nature and impact of any
extraordinary transactions such as any acquisition or divestiture of a business
unit or any assets. These are representative of the factors that could affect
the outcome of the forward-looking statements. In addition, such statements
could be affected by general industry and market conditions, and general
economic conditions, including interest rate fluctuations, federal, state and
local laws and regulations affecting the retail gas industry or the energy
industry generally, and other factors.


<PAGE>



ITEM 8.  Financial Statements and Supplementary Data.

The information required here is included in the report as set forth in the
Index to Consolidated Financial Statements on page F-1.

     ITEM 9. Changes in and  Disagreements  with  Accountants  on Accounting and
Financial Disclosure.

None.

                                    PART III


ITEM 10.  Directors and Executive Officers of Registrant.

There is incorporated in this Item 10 by reference the information in the
Company's definitive proxy statement for the 2000 Annual Meeting of Stockholders
under the captions Board of Directors -- Board Size and Composition and
Executive Officers and Compensation -- Executive Officers Who Are Not Directors.

ITEM 11.  Executive Compensation.

There is incorporated in this Item 11 by reference the information in the
Company's definitive proxy statement for the 2000 Annual Meeting of Stockholders
under the captions Executive Officers and Compensation -- Executive Compensation
and Certain Relationships.

ITEM 12.  Security Ownership of Certain Beneficial Owners and Management.

There is incorporated in this Item 12 by reference the information in the
Company's definitive proxy statement for the 2000 Annual Meeting of Stockholders
under the caption Security Ownership.

ITEM 13.  Certain Relationships and Related Transactions.

There is incorporated in this Item 13 by reference the information in the
Company's definitive proxy statement for the 2000 Annual Meeting of Stockholders
under the caption Certain Relationships.

     PART IV


ITEM 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K.

(a)(1) and (2)    Financial Statements and Financial Statement Schedules.
                  See Index to Consolidated Financial Statements
                  set forth on page F-1.

(a)(3)   Exhibits.
         --------

Exhibit No.                                                         Description

      2(a)    Agreement of Merger between Southern Union Company and Fall River
              Gas Company dated as of October 4, 1999. (Filed as Exhibit 2 to
              Southern Union's Current Report on Form 8-K filed on October 4,
              1999 and incorporated herein by reference.)

      2(b)    Agreement and Plan of Merger among Southern Union Company, GUS
              Acquisition Corporation and Providence Energy Corporation dated
              November 15, 1999. (Filed as Exhibit 2 to Southern Union's Current
              report on Form 8-K filed on November 19, 1999 and incorporated
              herein by reference.)



<PAGE>



Exhibit No.                                                         Description

      2(c)    Agreement and Plan of Merger among Southern Union Company, SUG
              Acquisition Corporation and Valley Resources, Inc. dated November
              30, 1999. (Filed as Exhibit 2 to Southern Union's Current Report
              on Form 8-K filed on December 6, 1999 and incorporated herein by
              reference.)

     2(d)  Agreement of Merger between  Southern Union Company and  Pennsylvania
Enterprises,  Inc.  dated as of June 7, 1999.  (Filed as  Exhibit 2 to  Southern
Union's  Current  Report  on Form 8-K  filed on June 15,  1999 and  incorporated
herein by reference.)

      3(a)    Restated Certificate of Incorporation of Southern Union Company.
              (Filed as Exhibit 3(a) to Southern Union's Transition Report on
              Form 10-K for the year ended June 30, 1994 and incorporated herein
              by reference.)

      3(b)    Amendment to Restated Certificate of Incorporation of Southern
              Union Company which was filed with the Secretary of State of
              Delaware and became effective on October 26, 1999. (Filed as
              Exhibit 3(a) to Southern Union's Quarterly Report on Form 10-Q for
              the quarter ended December 31, 1999 and incorporated herein by
              reference.)

      3(c)    Southern Union Company Bylaws, as amended. (Filed as Exhibit 3(a)
              to Southern Union's Quarterly Report on Form 10-Q for the quarter
              ended December 31, 1999 and incorporated herein by reference.)

      4(a)    Specimen Common Stock Certificate. (Filed as Exhibit 4(a) to
              Southern Union's Annual Report on Form 10-K for the year ended
              December 31, 1989 and incorporated herein by reference.)

     4(b) Indenture between Chase Manhattan Bank, N.A., as trustee, and Southern
Union Company dated January 31, 1994.  (Filed as Exhibit 4.1 to Southern Union's
Current  Report on Form 8-K dated February 15, 1994 and  incorporated  herein by
reference.)

      4(c)    Officers' Certificate dated January 31, 1994 setting forth the
              terms of the 7.60% Senior Debt Securities due 2024. (Filed as
              Exhibit 4.2 to Southern Union's Current Report on Form 8-K dated
              February 15, 1994 and incorporated herein by reference.)

      4(d)    Officer's Certificate of Southern Union Company dated November 3,
              1999 with respect to 8.25% Senior Notes due 2029. (Filed as
              Exhibit 99.1 to Southern Union's Current Report on Form 8-K filed
              on November 19, 1999 and incorporated herein by reference.)

     4(e)  Certificate of Trust of Southern Union Financing I. (Filed as Exhibit
4-A to Southern Union's  Registration  Statement on Form S-3 (No.  33-58297) and
incorporated herein by reference.)

     4(f) Certificate of Trust of Southern Union Financing II. (Filed as Exhibit
4-B to Southern Union's  Registration  Statement on Form S-3 (No.  33-58297) and
incorporated herein by reference.)

     4(g)  Certificate  of Trust of  Southern  Union  Financing  III.  (Filed as
Exhibit  4-C to  Southern  Union's  Registration  Statement  on  Form  S-3  (No.
33-58297) and incorporated herein by reference.)

     4(h) Form of Amended and Restated  Declaration  of Trust of Southern  Union
Financing I. (Filed as Exhibit 4-D to Southern Union's Registration Statement on
Form S-3 (No. 33-58297) and incorporated herein by reference.)

     4(i) Form of Subordinated  Debt  Securities  Indenture among Southern Union
Company and The Chase Manhattan  Bank, N. A., as Trustee.  (Filed as Exhibit 4-G
to  Southern  Union's  Registration  Statement  on Form S-3 (No.  33-58297)  and
incorporated herein by reference.)




<PAGE>



Exhibit No.                                                        Description

      4(j)    Form of Supplemental Indenture to Subordinated Debt Securities
              Indenture with respect to the Subordinated Debt Securities issued
              in connection with the Southern Union Financing I Preferred
              Securities. (Filed as Exhibit 4-H to Southern Union's Registration
              Statement on Form S-3 (No. 33-58297) and incorporated herein by
              reference.)

     4(k) Form of Southern  Union  Financing I Preferred  Security  (included in
4(g) above.) (Filed as Exhibit 4-I to Southern Union's Registration Statement on
Form S-3 (No. 33-58297) and incorporated herein by reference.)

     4(l) Form of Subordinated Debt Security (included in 4(i) above.) (Filed as
Exhibit  4-J to  Southern  Union's  Registration  Statement  on  Form  S-3  (No.
33-58297) and incorporated herein by reference.)

     4(m) Form of Guarantee with respect to Southern Union Financing I Preferred
Securities.  (Filed as Exhibit 4-K to Southern Union's Registration Statement on
Form S-3 (No. 33-58297) and incorporated herein by reference.)

      4(n)    First Mortgage Bonds Debenture of Mortgage and Deed of Trust dated
              as of March 15, 1946 by Southern Union Company (as successor to PG
              Energy, Inc. formerly, Pennsylvania Gas and Water Company, and
              originally, Scranton-Spring Brook Water Service Company to
              Guaranty Trust Company of New York. (Filed as Exhibit 4.1 to
              Southern Union's Current Report on Form 8-K filed on December 30,
              1999 and incorporated herein by reference.)

      4(o)    Twenty-Third Supplemental Indenture dated as of August 15, 1989
              (Supplemental to Indenture dated as of March 15, 1946) between
              Southern Union Company and Morgan Guaranty Trust Company of New
              York (formerly Guaranty Trust Company of New York). (Filed as
              Exhibit 4.2 to Southern Union's Current Report on Form 8-K filed
              on December 30, 1999 and incorporated herein by reference.)

      4(p)    Twenty-Sixth Supplemental Indenture dated as of December 1, 1992
              (Supplemental to Indenture dated as of March 15, 1946) between
              Southern Union Company and Morgan Guaranty Trust Company of New
              York. (Filed as Exhibit 4.3 to Southern Union's Current Report on
              Form 8-K filed on December 30, 1999 and incorporated herein by
              reference.)

      4(q)    Thirtieth Supplemental Indenture dated as of December 1, 1995
              (Supplemental to Indenture dated as of March 15, 1946) between
              Southern Union Company and First Trust of New York, National
              Association (as successor trustee to Morgan Guaranty Trust Company
              of New York). (Filed as Exhibit 4.4 to Southern Union's Current
              Report on Form 8-K filed on December 30, 1999 and incorporated
              herein by reference.)

      4(r)    Thirty-First Supplemental Indenture dated as of November 4, 1999
              (Supplemental to Indenture dated as of March 15, 1946) between
              Southern Union Company and U. S. Bank Trust, National Association
              (formerly, First Trust of New York, National Association). (Filed
              as Exhibit 4.5 to Southern Union's Current Report on Form 8-K
              filed on December 30, 1999 and incorporated herein by reference.)

      4(s)    Pennsylvania Gas and Water Company Bond Purchase Agreement dated
              September 1, 1989. (Filed as Exhibit 4.6 to Southern Union's
              Current Report on Form 8-K filed on December 30, 1999 and
              incorporated herein by reference.)

      4(t)    Southern Union is a party to other debt instruments, none of which
              authorizes the issuance of debt securities in an amount which
              exceeds 10% of the total assets of Southern Union. Southern Union
              hereby agrees to furnish a copy of any of these instruments to the
              Commission upon request.

      10(a)   Amended and Restated Revolving Credit Agreement (Long-Term Credit
              Facility) between Southern Union Company and the Banks named
              therein dated May 31, 2000.



<PAGE>



Exhibit No.                                                       Description

      10(b)   Amended and Restated Revolving Credit Agreement (Short-Term Credit
              Facility) between Southern Union Company and the Banks named
              therein dated May 31, 2000.

     10(c) Term Loan Credit  Agreement  between  Southern  Union Company and the
Banks named therein dated August 28, 2000.

     10(d) Southern  Union Company 1982 Incentive  Stock Option Plan and form of
related Stock Option Agreement. (Filed as Exhibits 4.1 and 4.2 to Form S-8, File
No. 2-79612 and incorporated herein by reference.)(*)

      10(e)   Form of Indemnification Agreement between Southern Union Company
              and each of the Directors of Southern Union Company. (Filed as
              Exhibit 10(i) to Southern Union's Annual Report on Form 10-K for
              the year ended December 31, 1986 and incorporated herein by
              reference.)

      10(f)   Southern Union Company 1992 Long-Term Stock Incentive Plan, As
              Amended. (Filed as Exhibit 10(l) to Southern Union's Annual Report
              on Form 10-K for the year ended June 30, 1998 and incorporated
              herein by reference.)(*)

      10(g)   Southern Union Company Director's Deferred Compensation Plan.
              (Filed as Exhibit 10(g) to Southern Union's Annual Report on Form
              10-K for the year ended December 31, 1993 and incorporated herein
              by reference.)(*)

      10(h)   Southern Union Company Amended Supplemental Deferred Compensation
              Plan with Amendments. (Filed as Exhibit 4 to Southern Union's Form
              S-8 filed March 27, 1999 and incorporated herein by reference.)(*)

      10(i)   Form of warrant granted to Fleischman and Walsh L.L.P. (Filed as
              Exhibit 10(j) to Southern Union's Transition Report on Form 10-K
              for the year ended June 30, 1994 and incorporated herein by
              reference.)

      10(j)   Renewal Promissory Note Agreement between Peter H. Kelley and
              Southern Union Company dated May 31, 1995. (Filed as Exhibit 10(i)
              to Southern Union's Annual Report on Form 10-K for the year ended
              June 30, 1995 and incorporated herein by reference.)

      10(k)   Employment agreement between Thomas F. Karam and Southern Union
              Company dated December 28, 1999. (Filed as Exhibit 10(a) to
              Southern Union's Quarterly Report on Form 10-Q for the quarter
              ended December 31, 1999 and incorporated herein by reference.)

      10(l)   Secured Promissory Note and Security Agreements between Thomas F.
              Karam and Southern Union Company dated December 20, 1999. (Filed
              as Exhibit 10(b) to Southern Union's Quarterly Report on Form 10-Q
              for the quarter ended December 31, 1999 and incorporated herein by
              reference.)

     10(m) Southern Union Company  Pennsylvania  Division Stock  Incentive Plan.
(Filed as Exhibit 4 to Form S-8,  SEC File No.  333-36146,  filed on May 3, 2000
and incorporated herein by reference.)*

     10(n) Southern Union Company Pennsylvania  Division 1992 Stock Option Plan.
(Filed as Exhibit 4 to Form S-8,  SEC File No.  333-36150,  filed on May 3, 2000
and incorporated herein by reference.)*

      13      Portions of Company's Annual Report to Stockholders.

      21      Subsidiaries of the Company.




*     Indicates Management Compensation Plan.
Exhibit No.                                                         Description

      23      Consent of Independent Accountants.

      24      Power of Attorney.



     (b) Reports on Form 8-K.  Southern Union's Current Report on Form 8-K dated
June  5,  2000  providing  certain  historical financial
statements  and related notes thereto of Valley  Resources,  Inc. and Providence
Energy Corporation.





<PAGE>








                                   SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Southern Union has duly caused this report to be signed by the
undersigned, thereunto duly authorized, on April 25, 2001.


                             SOUTHERN UNION COMPANY


                             By    RONALD J. ENDRES
                                   -------------------------
                                   Ronald J. Endres
                                   Executive Vice President and Chief Financial
                                   Officer



                              By    DAVID J. KVAPIL
                                    -------------------------
                                    David J. Kvapil
                                  Senior Vice President and Corporate Controller
                                  (Principal Accounting Officer)




<PAGE>



                     SOUTHERN UNION COMPANY AND SUBSIDIARIES
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>


                                                                                                                 Page
                                                                                                                -------
<S>     <C>    <C>    <C>    <C>    <C>    <C>

Financial Statements
     Consolidated statement of operations -- years ended June 30, 2000, 1999 and 1998.....................      F-2
     Consolidated balance sheet -- June 30, 2000 and 1999.................................................      F-3 to F-4
     Consolidated statement of cash flows -- years ended June 30, 2000, 1999 and 1998.....................      F-5
     Consolidated statement of common stockholders' equity -- years ended June 30, 2000,
         1999 and 1998....................................................................................      F-6
     Notes to consolidated financial statements...........................................................      F-7 to F-28
     Report of independent accountants....................................................................      F-29

</TABLE>

All schedules are omitted as the required information is not applicable or the
information is presented in the consolidated financial statements or related
notes.



<PAGE>



                     SOUTHERN UNION COMPANY AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>


                                                               Year Ended June 30,
                                                        2000           1999           1998
                                                                    (Restated)
                                                      (thousands of dollars, except shares
                                                                      and
                                                               per share amounts)
<S>     <C>    <C>    <C>    <C>    <C>    <C>

Operating revenues ..............................   $    831,704    $    605,231    $    669,304
Cost of gas and other energy ....................        497,698         342,301         405,580
-------------------------------------------------   ------------    ------------    ------------
     Operating margin ...........................        334,006         262,930         263,724
Revenue related taxes ...........................        (34,896)        (32,034)        (34,886)
-------------------------------------------------   ------------    ------------    ------------
     Net operating margin .......................        299,110         230,896         228,838

Operating expenses:
     Operating, maintenance and general .........        136,587         109,693         107,527
     Depreciation and amortization ..............         55,140          41,855          38,439
     Taxes, other than on income and revenues ...         17,269          14,501          14,205
-------------------------------------------------   ------------    ------------    ------------
         Total operating expenses ...............        208,996         166,049         160,171
         Net operating revenues .................         90,114          64,847          68,667
-------------------------------------------------   ------------    ------------    ------------
Other income (expenses):
     Interest ...................................        (51,492)        (35,999)        (34,884)
     Dividends on preferred securities of
          subsidiary trust ......................         (9,480)         (9,480)         (9,480)
     Write-off of regulatory assets .............           --              --            (8,163)
     Other, net .................................         (9,708)         (1,814)          4,073
-------------------------------------------------   ------------    ------------    ------------
         Total other expenses, net ..............        (70,680)        (47,293)        (48,454)
-------------------------------------------------   ------------    ------------    ------------

Earnings before income taxes ....................         19,434          17,554          20,213

Federal and state income taxes ..................          9,589           7,109          7,984
-------------------------------------------------   ------------    ------------    ------------

Net earnings available for common stock .........   $      9,845    $     10,445    $    12,229
=================================================   ============    ============    ============

Net earnings per share:
     Basic ......................................   $        .23    $        .32    $       .38
                                                    ============    ============    ============
     Diluted ....................................   $        .22    $        .31    $       .37
                                                    ============    ============    ============

Weighted average shares outstanding:
     Basic ......................................     43,427,728      32,437,242      31,925,072
=================================================   ============    ============    ============
     Diluted ....................................     45,400,778      34,216,984      33,169,295
                                                    ============    ============    ============


</TABLE>










                             See accompanying notes.


<PAGE>



                     SOUTHERN UNION COMPANY AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>



     ASSETS

                                                                                    June 30,
                                                                               2000            1999
                                                                                -------------------
                                                                                      (Restated)

                                                                                (thousands of dollars)
<S>     <C>    <C>    <C>    <C>    <C>    <C>

Property, plant and equipment:
     Plant in service .....................................................   $ 1,580,077    $ 1,106,905
     Construction work in progress ........................................        30,192         13,271
                                                                              -----------    -----------

                                                                                1,610,269      1,120,176
     Less accumulated depreciation and amortization .......................      (509,947)      (376,212)
                                                                              -----------    -----------

                                                                                1,100,322        743,964
     Additional purchase cost assigned to utility plant, net of accumulated
         amortization of $39,551,000 and $31,115,000, respectively ........       386,839        134,296
                                                                              -----------    -----------


         Net property, plant and equipment ................................     1,487,161        878,260


Current assets:
     Cash and cash equivalents ............................................        27,829           --
     Accounts receivable, billed and unbilled, net ........................        74,959         50,693
     Inventories, principally at average cost .............................        60,259         29,373
     Investment securities ................................................       187,817           --
     Prepayments and other ................................................           877          4,692
                                                                              -----------    -----------
         Total current assets .............................................       351,741         84,758

Deferred charges ..........................................................       145,006         96,635

Investment securities .....................................................        10,489         12,000

Real estate ...............................................................         9,461          9,420

Other .....................................................................        17,602          6,275


     Total assets .........................................................   $ 2,021,460    $ 1,087,348
                                                                              ===========    ===========



</TABLE>


                             See accompanying notes.


<PAGE>



                     SOUTHERN UNION COMPANY AND SUBSIDIARIES
                     CONSOLIDATED BALANCE SHEET (Continued)
<TABLE>
<CAPTION>



                      STOCKHOLDERS' EQUITY AND LIABILITIES


                                                                                      June 30,
                                                                                2000             1999
                                                                             -----------    ------------
                                                                                     (Restated)
                                                                                (thousands of dollars)
<S>     <C>    <C>    <C>    <C>    <C>    <C>

Common stockholders' equity:
     Common stock, $1 par value; authorized 200,000,000 shares; issued
         50,521,004 shares at June 30, 2000 ...............................   $    50,521    $    31,240
     Premium on capital stock .............................................       599,835        276,610
     Less treasury stock:  1,010,077 and 51,625 shares at cost at June 30,
         2000 and 1999, respectively ......................................       (15,554)          (794)
     Less common stock held in Trust: 964,577 and 281,939, respectively,
         shares ...........................................................       (15,330)        (5,562)
     Accumulated other comprehensive income ...............................       115,175           (436)
     Retained earnings ....................................................          --              --
                                                                              -----------    -----------

                                                                                  734,647        301,058

Company-obligated mandatorily redeemable preferred securities of subsidiary
     trust holding solely subordinated notes of Southern Union ............       100,000        100,000

Long-term debt and capital lease obligation ...............................       733,774        390,931
                                                                              -----------    -----------

         Total capitalization .............................................     1,568,421        791,989

Current liabilities:
     Long-term debt and capital lease obligation due within one year ......         2,193          2,066
     Notes payable ........................................................             3         21,003
     Accounts payable .....................................................        77,488         37,834
     Federal, state and local taxes .......................................         7,359         13,300
     Accrued interest .....................................................        15,922         12,176
     Customer deposits ....................................................        17,255         17,682
     Deferred gas purchases ...............................................        11,708         22,955
     Other ................................................................        30,778         16,612
                                                                              -----------    -----------

         Total current liabilities ........................................       162,706        143,628

Deferred credits and other ................................................       106,823         81,493

Accumulated deferred income taxes .........................................       183,510         70,238

Commitments and contingencies .............................................          --             --




         Total stockholders' equity and liabilities .......................   $ 2,021,460     $1,087,348
                                                                              ===========    ===========

</TABLE>


                             See accompanying notes.


<PAGE>



                     SOUTHERN UNION COMPANY AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>



                                                                              Year Ended  June 30,
                                                                         2000        1999       1998
                                                                                 (Restated)
                                                                           (thousands of dollars)
<S>     <C>    <C>    <C>    <C>    <C>    <C>

Cash flows from operating activities:
     Net earnings ................................................   $   9,845    $  10,445    $  12,229
     Adjustments to reconcile net earnings to net cash flows from
        operating activities:
         Depreciation and amortization ...........................      55,140       41,855       38,439
         Deferred income taxes ...................................         435        7,867        6,363
         Provision for bad debts .................................       4,998        3,279        5,461
         Write-off of regulatory assets ..........................         --           --         8,163
         Financial derivative trading losses .....................       2,236         --           --
         Deferred interest expense ...............................        (312)         619       (1,671)
         Gain on sale of investment securities ...................        --           --         (1,088)
         Other ...................................................       1,708        1,004        1,447
         Changes in assets and liabilities, net of acquisitions:
              Accounts receivable, billed and unbilled ...........      (3,830)        (212)         132
              Accounts payable ...................................      22,602        5,228       (7,066)
              Taxes and other liabilities ........................      (5,636)      (1,240)         146
              Customer deposits ..................................      (3,407)          (4)         201
              Deferred gas purchases .............................     (15,114)      10,698        8,693
              Inventories ........................................          91       (3,213)      (4,361)
              Other ..............................................       1,766          527        1,169
------------------------------------------------------------------   ---------    ---------    ---------
         Net cash flows from operating activities ................      70,522       76,853       68,257
------------------------------------------------------------------   ---------    ---------    ---------

Cash flows from (used in) investing activities:
     Additions to property, plant and equipment ..................    (100,446)     (73,147)     (77,018)
     Acquisition of operations, net of cash received .............     (38,366)        --          6,502
     Purchase of investment securities ...........................     (21,001)      (7,000)      (5,000)
     Increase in customer advances ...............................       1,350        2,139        3,562
     Decrease in deferred charges and credits ....................      (3,657)      (4,086)      (1,786)
     Proceeds from sale of investment securities .................       --           --          6,531
     Proceeds from sale of subsidiary ............................      12,150         --           --
     Other .......................................................      (4,553)         885       1,575
------------------------------------------------------------------   ---------    ---------    ---------

         Net cash flows used in investing activities .............    (154,523)     (81,209)    (65,634)
------------------------------------------------------------------  ---------     ---------    ---------

Cash flows from (used in) financing activities:
     Issuance of long-term debt ..................................     300,000         --           --
     Issuance cost of debt .......................................      (7,292)        --           --
     Premium on early extinguishment of debt .....................        (719)        --           --
     Purchase of treasury stock ..................................     (14,425)        --           --
     Repayment of debt and capital lease obligation ..............    (138,791)     (20,837)      (1,309)
     Net borrowings (payments) under revolving credit facilities .     (21,000)      19,403         --
     Increase (decrease) in cash overdrafts ......................      (6,655)       6,033         (945)
     Other .......................................................         712         (243)        (369)
------------------------------------------------------------------   ---------    ---------    ---------
         Net cash flows from (used in) financing activities .....     111,830         4,356       (2,623)
-----------------------------------------------------------------    ---------    ---------    ---------

Increase in cash and cash equivalents ...........................      27,829         --           --
Cash and cash equivalents at beginning of year ..................       --           --            --
-----------------------------------------------------------------   ---------     ---------    ---------
Cash and cash equivalents at end of year .......................    $  27,829     $    --      $      --
                                                                    =========     =========    =========
</TABLE>

Cash paid for interest, net of amounts capitalized, in 2000, 1999 and 1998 was
$57,735,000, $45,039,000 and $33,997,000, respectively. Cash paid for income
taxes in 2000, 1999 and 1998 was $4,311,000, $1,194,000 and $4,511,000,
respectively.





                             See accompanying notes.


<PAGE>

<TABLE>
<CAPTION>


                    SOUTHERN UNION COMPANY AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY



                                                                                    Common  Accumulated
                                                   Common     Premium    Treasury   Stock      Other
                                                   Stock,$1  on Capital  Stock, at  Held in  Comprehen-   Retained
                                                  Par Value    Stock       Cost      Trust   sive Income  Earnings   Total
                                                  ---------  ---------   ---------  -------  ------------ --------  --------
                                                                           (thousands of dollars)
<S>     <C>    <C>    <C>    <C>    <C>    <C>

Balance July 1, 1997 ..........................   $ 17,171   $ 225,252   $  (794)   $   --    $  664    $ 25,169    $ 267,462

   Comprehensive income:
     Net earnings .............................        --          --         --        --        --      12,229       12,229
     Reclassification adjustment for
       gains included in net income ...........        --          --         --         --     (664)        --         (664)
                                                                                                                   ---------
     Comprehensive income .....................                                                                       11,565
                                                                                                                   ---------
   5% stock dividend ..........................       856      19,802         --         --       --     (20,658)        --
   Three-for-two stock split ..................     9,400      (9,400)        --         --       --          (2)        (2)
   Issuance of stock for acquisition ..........       756      17,285         --         --       --          --     18,041
   Exercise of stock options ..................        69        (301)        --         --       --          --       (232)
                                                ---------    --------    -------    -------   ------    --------   --------
Balance June 30, 1998 .........................    28,252     252,638       (794)        --       --      16,738    296,834

   Comprehensive income:
     Net earnings .............................        --          --         --         --       --      10,445     10,445
     Minimum pension liability
       adjustment; net of tax .................        --          --         --         --     (436)        --        (436)
                                                                                                                  ---------
     Comprehensive income .....................                                                                      10,009
                                                                                                                   ---------
   Common stock held in trust .................        --          --         --     (5,562)      --         --      (5,562)
   5% stock dividend -- declared
       November 11, 1998 ......................       1,411       7,483       --        --        --     (8,898)         (4)
   5% stock dividend -- declared
       July 13, 1999 ..........................       1,485      16,797       --        --        --    (18,285)         (3)
   Exercise of stock options ..................          92        (308)      --        --        --         --        (216)
                                                  ---------   ---------   ------  ---------  --------- ---------    ---------
Balance June 30, 1999 .........................      31,240     276,610     (794)   (5,562)     (436)        --      301,058

   Comprehensive income:
     Net earnings (restated) ..................        --          --         --        --        --       9,845       9,845
     Unrealized gain in investment
       securities, net of tax .................        --          --         --        --    115,175         --     115,175
     Minimum pension liability
       adjustment; net of tax .................        --          --         --        --        436         --         436
                                                                                                                   ---------
     Comprehensive income .....................                                                                      125,456
                                                                                                                   ---------
   Common stock held in trust .................        --          --         --    (10,037)       --         --     (10,037)
   5% stock dividend (restated) ...............       2,359     7,452         --        --         --     (9,845)        (34)
   Purchase of treasury stock .................        --         --     (14,425)       --         --         --     (14,425)
   Issuance of stock for acquisition ..........      16,714   315,235         --        --         --         --     331,949
   Exercise of stock options ..................         208       538       (335)      269         --         --         680
                                                  ---------   ---------  -------  --------   ---------   ---------   -------
Balance June 30, 2000 (restated) ..............   $  50,521   $599,835   $(15,554) $(15,330) $ 115,175   $    --     $734,647
===============================================   =========   =========  ========= ========= =========   =========   ========


</TABLE>








                             See accompanying notes.


<PAGE>



                     SOUTHERN UNION COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



                  I Summary of Significant Accounting Policies

Operations Southern Union Company (Southern Union and, together with its
wholly-owned subsidiaries, the Company), is a public utility primarily engaged
in the distribution and sale of natural gas to residential, commercial and
industrial customers located (during the periods reflected) primarily in Texas,
Missouri and Pennsylvania. See Acquisitions -- Acquisitions Subsequent to
Year-End. Subsidiaries of Southern Union also market natural gas to end-users,
distribute propane, operate natural gas pipeline systems and sell commercial gas
air conditioning and other gas-fired engine-driven applications. The Company has
also entered the electric generation and marketing business through the recent
acquisition of Pennsylvania Enterprises, Inc. (hereafter referred to as the
Pennsylvania Operations). Certain subsidiaries own or hold interests in real
estate and other assets, which are primarily used in the Company's utility
business. Substantial operations of the Company are subject to regulation.
Accounting policies conform to the Financial Accounting Standards Board (FASB)
standard, Accounting for the Effects of Certain Types of Regulation in the case
of regulated operations.

Principles of Consolidation The consolidated financial statements include the
accounts of Southern Union and its wholly-owned subsidiaries. Investments in
which the Company has significant influence over the operations of the investee
and the Company owns a 20% to 50% interest are accounted for using the equity
method. All significant intercompany accounts and transactions are eliminated in
consolidation. All dollar amounts in the tables herein, except per share
amounts, are stated in thousands unless otherwise indicated.

Gas Utility Revenues and Gas Purchase Costs Gas utility customers are billed on
a monthly-cycle basis. The related cost of gas and revenue taxes are matched
with cycle-billed revenues through utilization of purchased gas adjustment
provisions in tariffs approved by the regulatory agencies having jurisdiction.
Revenues from gas delivered but not yet billed are accrued, along with the
related gas purchase costs and revenue-related taxes. The distribution and sale
of natural gas in Texas, Missouri and Pennsylvania contributed in excess of 85%
of the Company's total revenue, net earnings and identifiable assets in 2000,
1999 and 1998. Four suppliers provided 55%, 50% and 45% of the Company's gas
purchases in 2000, 1999 and 1998, respectively.

Earnings Per Share The Company's earnings per share presentation conforms to the
FASB standard, Earnings per Share. All share and per share data have been
restated for all stock dividends and stock splits unless otherwise noted.

Accumulated Other Comprehensive Income In 1999, the Company adopted Reporting
Comprehensive Income, an FASB standard which established rules for the reporting
of comprehensive income and its components. The main components of comprehensive
income that relate to the Company are net earnings, unrealized holding gains on
investments and additional minimum pension liability adjustments, all of which
are presented in the consolidated statement of stockholders' equity. Prior to
adoption, the unrealized holding gains were presented as part of stockholders'
equity and the pension liability adjustments were presented in the consolidated
balance sheet.

Unrealized holding gains on investment securities were $115,175,000, nil and nil
in 2000, 1999 and 1998, respectively. The reclassification adjustment for gains
included in net income, net of tax, for reporting other comprehensive income was
nil, nil and $664,000 in 2000, 1999 and 1998, respectively. The unrealized
holding gains on investment securities and the reclassification adjustment for
gains are combined and reflected on the consolidated statement of stockholders'
equity.

Credit Risk Concentrations of credit risk in trade receivables are limited due
to the large customer base with relatively small individual account balances. In
addition, Company policy requires a deposit from certain customers. The Company
has recorded an allowance for doubtful accounts totaling $7,503,000, $6,588,000,
$8,267,000 and $10,765,000 at June 30, 2000, 1999, 1998 and 1997, respectively.
The allowance for doubtful accounts is increased for estimated uncollectible
accounts and reduced for the write-off of trade receivables.


<PAGE>



                     SOUTHERN UNION COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Fair Value of Financial Instruments The carrying amounts reported in the balance
sheet for cash and cash equivalents, accounts receivable, accounts payable and
notes payable approximate their fair value. The fair value of the Company's
preferred securities of subsidiary trust and long-term debt is estimated using
current market quotes and other estimation techniques.

Inventories Inventories consist of natural gas in underground storage and
materials and supplies. Natural gas in underground storage of $51,869,420 and
$23,680,000 at June 30, 2000 and 1999, respectively, consists of 15,226,000 and
10,429,000 British thermal units, respectively.

Segment Reporting The FASB standard, Disclosures about Segments of an Enterprise
and Related Information, requires disclosure of segment data based on how
management makes decisions about allocating resources to segments and measuring
performance. The Company is principally engaged in the gas distribution industry
in the United States and has no other reportable industry segments.

New Pronouncements In June 1998, the FASB issued Accounting for Derivative
Instruments and Hedging Activities. The Statement, as amended, is effective for
all fiscal quarters of all fiscal years beginning after June 15, 2000; the
Company as required will adopt the Statement on July 1, 2000. The Statement
requires that all derivative instruments be recorded on the balance sheet at
fair value. Changes in the fair value of derivatives are recorded each period in
current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, depending
on the type of hedge transaction. During the Company's implementation
procedures, the Company identified a fair value hedge, cash flow hedges and gas
purchase contracts that are considered derivatives under the Statement. Based on
the Company's risk exposure, the Company does not anticipate a material effect
on its financial position, results of operations or cash flows resulting from
counterparty non-performance.

The Company entered into an interest rate swap to reduce exposure to changes in
fair value of fixed interest payments related to a lease commitment. For
fair-value hedge transactions in which the Company is hedging changes in an
asset's, liability's or firm commitment's fair value, changes in the fair value
of the derivative instrument will generally be offset in the income statement by
changes in the hedged item's fair value. The Company estimates that the
transition adjustment related to the fair value hedge will be immaterial to the
financial statements.

The Company is party to two interest rate swaps designed to hedge exposure to
variability in cash flows from interest rate changes on variable rate debt. For
cash flow hedges related to a variable-rate asset, liability or a forecasted
transaction, changes in the fair value attributed to the effective portion of
the derivative instrument will be reported in other comprehensive income. The
gains and losses on the derivative instrument that are reported in other
comprehensive income will be reclassified as earnings in the periods in which
earnings are impacted by the variability of the cash flows of the hedged item.
The ineffective portion of all hedges will be recognized in current-period
earnings. The Company estimates that it will record a net-of-tax
cumulative-effect-type adjustment of $960,000 gain in accumulated other
comprehensive income to recognize at fair value all derivative instruments that
will be designated as cash flow hedging instruments.

The Company's assessment also identified two gas purchase contracts at its
recently acquired PG Energy Division that have been determined to be derivatives
that do not qualify for hedge accounting treatment under the Statement. The
Company estimates that it will record a net-of-tax cumulative effect-type
adjustment of $700,000 gain in earnings to recognize the fair value of the
derivative instruments that do not qualify for hedge accounting treatment under
the Statement. These derivatives will be reflected at quoted or estimated market
value with resulting gains and losses included in operating income in the
Consolidated Statement of Income.

Energy trading contracts entered into for speculative purposes are recorded at
fair value as of each balance sheet date with gains and losses included in
earnings.



<PAGE>



         SOUTHERN UNION COMPANY AND SUBSIDIARIES
     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



In December 1999, the Securities Exchange Commission staff issued a Staff
Accounting Bulletin, Revenue Recognition, which provides guidance on the
recognition and disclosure of revenues. Implementation of this StaffAccounting
Bulletin is required by the fourth quarter of 2001 and will have no effect on
the Company's Consolidated Financial Statements.

Use of Estimates The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

                                 II Restatement

In March 2001, the Company discovered unauthorized financial derivative energy
trading activity by a non-regulated, wholly-owned subsidiary. During March 2001
and April 2001, all unauthorized trading activity was closed resulting in a
cumulative cash expense of $191,000, net of tax. However, due to certain
accounting rules, such trading contracts must be recorded at fair value as of
each balance sheet date with gains and losses included in earnings. As a result,
a restatement of financial information for the fiscal year ended June 30, 2000
and the two subsequent quarters was required. This restatement resulted in
non-cash losses of $1,207,000, net of tax, ($.02 per diluted share) for the
fiscal year ended June 30, 2000. Additionally, a portion of the 5% common stock
dividend which was previously reported in 2000 as a reduction of retained
earnings has been reclassified to premium on capital stock.

                                III Acquisitions

Pennsylvania Enterprises, Inc.

On November 4, 1999, the Company acquired the Pennsylvania Operations in a
transaction valued at approximately $500 million, including assumption of
long-term debt of approximately $115 million. The Company issued approximately
16.7 million pre-stock dividend shares of common stock and paid approximately
$36 million in cash to complete the transaction. The Pennsylvania Operations are
headquartered in Wilkes-Barre, Pennsylvania with natural gas distribution being
its primary business. The principal operating division of the Pennsylvania
Operations is the PG Energy division of the Company which serves more than
154,000 gas customers in northeastern and central Pennsylvania. Subsidiaries of
the Company included in the Pennsylvania Operations include PG Energy Services
Inc., (Energy Services), Keystone Pipeline Services, Inc. (Keystone, a
wholly-owned subsidiary of PG Energy Services Inc.), PEI Power Corporation, and
Theta Land Corporation. Through Energy Services the Company markets a
diversified range of energy-related products and services under the name of PG
Energy PowerPlus and supplies propane under the name of PG Energy Propane.
Keystone provides pipeline and fiber optic cable construction, installation,
maintenance, and rehabilitation services. PEI Power Corporation operates a
cogeneration plant that generates steam and electricity for resale. Theta Land
Corporation, which provided land management and development services for more
than 44,000 acres of land, was sold for $12,150,000 in January, 2000. No gain or
loss was recognized on this transaction. Upon acquiring the Pennsylvania
Operations, the Company made the strategic decision to sell Keystone and the
propane operations of Energy Services; these operations are not material to the
Company. The Company has not yet sold these operations and there can be no
assurance that a sale on terms satisfactory to the Company will be completed.

The Company funded the cash portion of the acquisition of the Pennsylvania
Operations and related refinancings with the sale of $300,000,000 of 8.25%
Senior Notes due 2029 completed on November 3, 1999 (8.25% Senior Notes). See
Debt and Capital Lease. The assets of the Pennsylvania Operations are included
in the consolidated balance sheet of the Company at June 30, 2000 and the
results of operations from the Pennsylvania Operations has been included in the
statement of consolidated operations since November 4, 1999. The acquisition was
accounted for using the purchase method. The additional purchase cost assigned
to utility plant of approximately $261,000,000


<PAGE>



         SOUTHERN UNION COMPANY AND SUBSIDIARIES
     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



reflects the excess of the purchase price over the historical book carrying
value of the utility plant. Amortization of the additional purchase cost
assigned to utility plant is provided on a straight-line basis over forty years.

Prior to the consummation of the acquisition, the Company purchased 358,500
shares of Pennsylvania Enterprises, Inc. stock for $11,887,000 during both the
first and second quarters of the Company's fiscal year 2000. As all necessary
approvals for the merger had not been obtained, these purchases were treated as
investment securities.

Pro Forma Financial Information

The following unaudited pro forma financial information for the year ended June
30, 2000 and 1999 is presented as though the following events had occurred at
the beginning of the earliest period presented: (i) the acquisition of
Pennsylvania Enterprises, Inc.; (ii) the sale of the 8.25% Senior Notes; and
(iii) the refinancing of certain short-term and long-term debt at the time of
acquisition. The pro forma financial information is not necessarily indicative
of the results which would have actually been obtained had the acquisition of
Pennsylvania Enterprises, Inc., the sale of senior notes or the refinancings
been completed as of the assumed date for the periods presented or which may be
obtained in the future.

                                            Year Ended June 30,
                                            2000        1999
                                               (Restated)

Operating revenues ....................   $880,190   $838,836
Income before extraordinary item ......      2,079      5,782
Net earnings available for common stock      2,079      5,782
Net earnings per common stock:
     Basic ............................        .05        .12
     Diluted ..........................        .05        .11

Other Acquisitions

Effective December 31, 1997, the Company acquired Atlantic Utilities Corporation
and Subsidiaries (Atlantic) for 755,650 pre-split and pre-stock dividend shares
of common stock valued at $18,041,000 and $4,436,000 of cash. Atlantic is
operated as South Florida Natural Gas, a natural gas division of Southern Union,
and Atlantic Gas Corporation, a propane subsidiary of the Company. Atlantic
currently serves 6,000 customers in central Florida. The assets of Atlantic were
included in the Company's consolidated balance sheet at January 1, 1998 and its
results of operations have been included in the Company's statements of
consolidated operations and cash flows since January 1, 1998. On the date of
acquisition, Atlantic had $11,683,000 of cash and cash equivalents. The
acquisition was accounted for using the purchase method. The additional purchase
cost assigned to utility plant of $10,000,000 reflects the excess of the
purchase price over the historical book carrying value of the net assets
acquired. The additional purchase cost is amortized on a straight-line basis
over forty years.

On July 23, 1997 two subsidiaries of Southern Union acquired an equity ownership
in a natural gas distribution company and other related operations currently
serving 22,000 customers in Piedras Negras, Mexico (Mexico Operations) for
$2,700,000. Southern Union currently has a 43% equity ownership in this company.
This system is across the U. S. - Mexico border from the Company's Eagle Pass,
Texas service area.

Acquisitions Subsequent to Year-End

On September 20, 2000, Southern Union completed the acquisition of Valley
Resources, Inc. (Valley Resources) for approximately $125 million in cash plus
the assumption of $30 million in long-term debt. As a result of the Valley
Resources merger, Valley Resources' two utility subsidiaries are now one
division of Southern Union operating as Valley Gas Company and Bristol and
Warren Gas Company, and Valley Resources' two non-utility subsidiaries are


<PAGE>



         SOUTHERN UNION COMPANY AND SUBSIDIARIES
     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



now subsidiaries of Southern Union. Valley Resources, which is headquartered in
Cumberland, Rhode Island, provides natural gas utility service to more than
64,000 customers. Valley Resources' utility service area covers a 92 square mile
area in the northeastern portion of Rhode Island that has a population of
approximately 250,000 and approximately 15 square miles in the eastern portion
of Rhode Island that has a population of approximately 35,000. Valley Resources'
non-utility subsidiaries rent and sell appliances, offer a service contract
program, sell liquid propane in Rhode Island and nearby Massachusetts, and
distribute as a wholesaler franchised lines to plumbing and heating contractors.
Included in the acquisition was Valley Resources' 90% interest in Alternate
Energy Corporation, which sells, installs and designs natural gas conversion
systems and facilities, is an authorized representative of the ONSI Corporation
fuel cell, holds patents for a natural gas/diesel co-firing system and for a
device to control the flow of fuel on dual-fuel equipment.

On September 28, 2000, Southern Union completed the acquisition of Providence
Energy Corporation (ProvEnergy) for approximately $270 million in cash plus the
assumption of $90 million in long-term debt. The ProvEnergy natural gas
distribution operations are Providence Gas and North Attleboro Gas. Providence
Gas serves approximately 168,000 natural gas customers in Providence and
Newport, Rhode Island, and 23 other cities and towns in Rhode Island and
Massachusetts. North Attleboro Gas serves approximately 6,000 customers in North
Attleboro and Plainville, Massachusetts, towns adjacent to the northeastern
Rhode Island border. The ProvEnergy utility service territories encompass
approximately 760 square miles with a population of approximately 850,000.
Subsidiaries of the Company included in the ProvEnergy merger are ProvEnergy Oil
Enterprises, Inc., Providence Energy Services, Inc., and ProvEnergy Power
Company, LLC. ProvEnergy Oil Enterprises, Inc. operates a fuel oil distribution
business through its subsidiary, ProvEnergy Fuels, Inc. (ProvEnergy Fuels).
ProvEnergy Fuels serves over 14,000 residential and commercial customers in
Rhode Island and Massachusetts. Providence Energy Services, Inc., whose
operations may be sold or disbanded, markets natural gas and energy services in
New England. ProvEnergy Power Company owns 50% of Capital Center Energy Company,
LLC., a joint venture formed between ProvEnergy and ERI Services, Inc. to
provide retail power.

On September 28, 2000, Southern Union completed the acquisition of Fall River
Gas Company (Fall River Gas) for approximately 1.5 million shares of Southern
Union common stock and approximately $27 million in cash plus assumption of $20
million in long-term debt. As a result of the merger, Fall River Gas is now a
division of Southern Union and Fall River Gas' non-regulated subsidiary, Fall
River Gas Appliance Company, Inc., is now a subsidiary of Southern Union.
Headquartered in Fall River, Massachusetts, Fall River Gas serves approximately
48,000 customers in the city of Fall River and the towns of Somerset, Swansea
and Westport, all located in southeastern Massachusetts. Fall River Gas
Appliance Company, Inc., rents water heaters and conversion burners (primarily
for residential use) in Fall River Gas' service area.

The aforementioned acquisitions subsequent to year-end shall be accounted for
under the purchase method.

                        IV Write-Off of Regulatory Assets

During 1998, the Company was impacted by pre-tax non-cash write-offs totaling
$8,163,000 of previously recorded regulatory assets. Pursuant to a 1989 Missouri
Public Service Commission (MPSC) order, Missouri Gas Energy, a division of the
Company, is engaged in a major gas safety program. In connection with this
program, the MPSC issued an accounting authority order in 1994 which authorized
Missouri Gas Energy to defer carrying costs at a rate of 10.54%. The MPSC rate
order of January 22, 1997, however, retroactively reduced the 10.54% carrying
cost rate used since early 1994 to an Allowance for Funds Used During
Construction (AFUDC) rate of approximately 6%. TheCompany filed an appeal of
this portion of the rate order in the Missouri State Court of Appeals, Western
District, and on August 18, 1998 was notified that the appeal was denied. This
resulted in a one-time non-cash write-off of $5,942,000 by the Company of
previously deferred costs in its fiscal year ended June 30, 1998. See
Commitments and Contingencies.


<PAGE>



         SOUTHERN UNION COMPANY AND SUBSIDIARIES
     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



On August 21, 1998, Missouri Gas Energy was notified by the MPSC of its decision
to grant a rate increase which, among other things, disallowed certain
previously recorded deferred costs associated with the rate filing, requiring an
additional pre-tax non-cash write-off of $2,221,000. The Company recorded this
charge to earnings in its fiscal year ended June 30, 1998. See Utility
Regulation and Rates.

                          V Other Income (Expense), Net

Other expense of $9,708,000 in 2000 included $10,363,000 of costs associated
with unsuccessful acquisition efforts and related litigation and $2,236,000 of
pre-tax non-cash financial derivative energy trading losses. This was partially
offset by net rental income of Lavaca Realty Company (Lavaca Realty) of
$1,757,000.

Other expense of $1,814,000 in 1999 included: $3,839,000 of costs associated
with various acquisition efforts and a net expense of $619,000 related to the
amortization and current deferral of interest and other expenses associated with
the Missouri Gas Energy Safety Program. This was partially offset by net rental
income of Lavaca Realty of $1,448,000 and equity earnings of $609,000 from
Southern Union's 43% equity ownership of its Mexico Operations.

Other income of $4,073,000 in 1998 included: $1,671,000 related to the deferral
of interest and other expenses associated with the Missouri Gas Energy Safety
Program; realized gains on the sale of investment securities of $1,088,000; and
net rental income of Lavaca Realty of $1,119,000. This was partially offset by
$885,000 of costs associated with various acquisition efforts.

                            VI Cash Flow Information

The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. Short-term investments are highly
liquid investments with maturities of more than three months when purchased, and
are carried at cost, which approximates market. The Company places its temporary
cash investments with a high credit quality financial institution which, in
turn, invests the temporary funds in a variety of high-quality short-term
financial securities.

Under the Company's cash management system, checks issued but not presented to
banks frequently result in overdraft balances for accounting purposes and are
classified in accounts payable in the consolidated balance sheet.

                             VII Earnings Per Share

During the three-year period ended June 30, 2000, no adjustments were required
in net earnings available for common stock for the earnings per share
calculations. Average shares outstanding for basic earnings per share were
43,427,728, 32,437,242 and 31,925,072 for the years ended June 30, 2000, 1999
and 1998, respectively. Diluted earnings per share includes average shares
outstanding as well as common stock equivalents from stock optionsand warrants.
Common stock equivalents were 1,973,050, 1,779,742 and 1,244,223 for the years
ended June 30, 2000, 1999 and 1998, respectively.

                       VIII Property, Plant and Equipment

Plant Plant in service and construction work in progress are stated at original
cost net of contributions in aid of construction. The cost of additions includes
an allowance for funds used during construction and applicable overhead charges.
Gain or loss is recognized upon the disposition of significant utility
properties and other property constitutingoperating units. Gain or loss from
minor dispositions of property is charged to accumulated depreciation and
amortization. The Company capitalizes the cost of significant
internally-developed computer software systems and amortizes the cost over the
expected useful life. See Debt and Capital Lease.



<PAGE>



                     SOUTHERN UNION COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>



                                                                   June 30,
                                                             2000           1999
                                                          --------------------------
<S>     <C>    <C>    <C>    <C>    <C>    <C>

Distribution plant ....................................   $ 1,479,426    $ 1,033,281
General plant .........................................       138,206        109,178
Other .................................................        19,735         16,648
                                                          -----------    -----------
     Total plant ......................................     1,637,367      1,159,107
Less contributions in aid of construction .............       (57,290)       (52,202)
                                                          -----------    -----------
     Plant in service .................................     1,580,077      1,106,905
Construction work in progress .........................        30,192         13,271
                                                          -----------    -----------
                                                            1,610,269      1,120,176
Less accumulated depreciation and amortization ........      (509,947)      (376,212)
                                                          -----------    -----------
                                                            1,100,322        743,964
Additional purchase cost assigned to utility plant, net       386,839        134,296
                                                          -----------    -----------
     Net property, plant and equipment ................   $ 1,487,161     $  878,260
                                                          ===========    ===========

</TABLE>

Acquisitions of rate-regulated entities are recorded at the historical book
carrying value of utility plant. On November 4, 1999, Pennsylvania Operations
was acquired in which historical utility plant and equipment had a cost and
accumulated depreciation and amortization of $408,304,000 and $103,275,000,
respectively. On December 31, 1997, Atlantic was acquired in which historical
utility plant and equipment had a cost and accumulated depreciation and
amortization of $5,253,000 and $2,540,000, respectively.

Additional purchase cost assigned to utility plant is the excess of the purchase
price over the book carrying value of the net assets acquired. In general, the
Company has not been allowed recovery of additional purchase cost assigned to
utility plant in rates. Periodically, the Company evaluates the carrying value
of its additional purchase cost assigned to utility plant, long-lived assets,
capital leases and other identifiable intangibles by comparing the anticipated
future operating income from the businesses giving rise to the respective asset
with the original cost or unamortized balance. No impairment was indicated or
expected at June 30, 2000.

Depreciation and Amortization Depreciation of utility plant is provided at an
average straight-line rate of approximately 3% per annum of the cost of such
depreciable properties less applicable salvage. Franchises are amortized over
their respective lives. Depreciation and amortization of other property is
provided at straight-line rates estimated to recover the costs of the
properties, after allowance for salvage, over their respective lives.
Internally-developed computer software system costs are amortized over various
regulatory-approved periods. Amortization of additional purchase cost assigned
to utility plant is provided on a straight-line basis over forty years unless
the Company's regulators have provided for the recovery of the additional
purchase cost in rates, in which case the Company's policy is to utilize the
amortization period which follows the rate recovery period.

Depreciation of property, plant and equipment in 2000, 1999 and 1998 was
$46,757,000, $37,771,000 and $34,477,000, respectively.

                            IX Investment Securities

At June 30, 2000, the Company held securities of Capstone Turbine Corporation
(Capstone). In late June 2000, Capstone completed its initial public offering
(IPO). This investment is classified as "available for sale" under the Financial
Accounting Standards Board Standard Accounting for Certain Investments in Debt
and Equity Securities; accordingly, these securities are stated at fair value,
with unrealized gains and losses recorded in a separatecomponent of common
stockholders' equity. Realized gains and losses on sales of investments, as
determined on a specific identification basis, are included in the Consolidated
Statement of Operations when incurred. As of June 30, 2000, the Company's
investment in Capstone had a fair value of $187,817,000 and the unrealized
gains, net of tax, related to this investment were $115,175,000 at such date.
The Company has classified


<PAGE>



                     SOUTHERN UNION COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



this investment as current, as it plans to monetize its investment as soon as
practicable following the completion of the applicable lock-up periods to which
it was subject in connection with the IPO and use the proceeds to reduce
outstanding debt.

At June 30, 2000 and 1999, all other securities owned by the Company are
accounted for under the cost method. The Company's other investments in
securities consist of preferred stock in non-public companies whose value is not
readily determinable. Realized gains and losses on sales of these investments,
as determined on a specific identification basis, are included in the
Consolidated Statement of Operations when incurred, and dividends are recognized
as income when received.

                             X Stockholders' Equity

Stock Splits and Dividends On June 30, 2000, August 6, 1999, December 9, 1998
and December 10, 1997 Southern Union distributed its annual 5% common stock
dividend to stockholders of record on June 19, 2000, July 23, 1999, November 23,
1998 and November 21, 1997, respectively. A portion of the 5% stock dividend
distributed on June 30, 2000, August 6, 1999 and December 9, 1998 was
characterized as a distribution of capital due to the level of the Company's
retained earnings available for distribution as of the declaration date. On July
13, 1998, Southern Union distributed a three-for-two stock split in the form of
a 50% stock dividend to stockholders of record on June 30, 1998. Unless
otherwise stated, all per share and share data included herein have been
restated to give effect to the dividends and split.

Common Stock The Company maintains its 1992 Long-Term Stock Incentive Plan (1992
Plan) under which options to purchase 6,986,010 shares were provided to be
granted to officers and key employees at prices not less than the fair market
value on the date of grant. The 1992 Plan allows for the granting of stock
appreciation rights, dividend equivalents, performance shares and restricted
stock. The Company also had an incentive stock option plan (1982 Plan) which
provided for the granting of 787,500 options, until December 31, 1991. Upon
exercise of an option granted under the 1982 Plan, the Company may elect,
instead of issuing shares, to make a cash payment equal to the difference at the
date of exercise between the option price and the market price of the shares as
to which such option is being exercised. Options granted under both the 1992
Plan and the 1982 Plan are exercisable for periods of ten years from the date of
grant or such lesser period as may be designated for particular options, and
become exercisable after a specified period of time from the date of grant in
cumulative annual installments. Options typically vest 20% per year for five
years but may be a lesser or greater period as designated for particular
options.

In connection with the acquisition of the Pennsylvania Operations, the Company
adopted the Pennsylvania Division 1992 Stock Option Plan (Pennsylvania Option
Plan) and the Pennsylvania Division Stock Incentive Plan (Pennsylvania Incentive
Plan). Under the terms of the Pennsylvania Option Plan, a total of 378,002
shares were provided to be granted to eligible employees. Stock options awarded
under the Pennsylvania Option Plan may be either Incentive Stock Options or
Nonqualified Stock Options. Upon acquisition, individuals not electing a cash
payment equal to the difference at the date of acquisition between the option
price and the market price of the shares as to which such option related, were
converted to Southern Union options using a conversion rate that maintained the
same aggregate value and the aggregate spread of the pre-acquisition options. No
additional options will be granted under the Pennsylvania Option Plan. Under the
terms of the Pennsylvania Incentive Plan, a total of 181,514 shares were
provided to be granted to eligible employees, officers and directors. Awards
under the Pennsylvania Incentive Plan may take the form of stock options,
restricted stock, and other awards where the value of the award is based upon
the performance of the Company's stock. Upon acquisition, individuals not
electing a cash payment equal to the difference at the date of acquisition
between the option price and the market price of the shares as to which such
option related, were converted to Southern Union options using a conversion rate
that maintained the same aggregate value and the aggregate spread of the
pre-acquisition options. During 2000, 12,600 options were granted to a Director
of the Company at an exercise price of $17.23. These options granted vest 20%
per year for five years. No additional options will be granted under the
Pennsylvania Incentive Plan.



<PAGE>



                     SOUTHERN UNION COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



The Company accounts for its incentive plans under the Accounting Principles
Board opinion, Accounting for Stock Issued to Employees and related
authoritative interpretations. The Company recorded no compensation expense for
2000, 1999 and 1998. During 1997, the Company adopted the FASB standard,
Accounting for Stock-Based Compensation, for footnote disclosure purposes only.
Had compensation cost for these incentive plans been determined consistent with
this standard, the Company's net income and diluted earnings per share would
have been $8,179,000 and $.18, respectively, in 2000, $9,429,000 and $.28,
respectively, in 1999, and $11,141,000 and $.34, respectively, in 1998. Because
this standard has not been applied to options granted prior to July 1, 1995, the
resulting pro forma compensation cost may not be representative of that to be
expected in future years.

The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions used for
grants in 2000 and 1998, respectively: dividend yield of nil for both years;
volatility of 27.5% and 19.5%; risk-free interest rate of 6% and 5.5%; and
expected life outstanding of 5.5 to 7.2 years for both years. No options were
granted during 1999.
<TABLE>
<CAPTION>

                                      1992 Plan                1982 Plan
                                           Weighted                  Weighted
                            Shares Under   Average     Shares Under  Average
                              Option    Exercise Price   Option     Exercise Price
<S>     <C>    <C>    <C>    <C>    <C>    <C>

Outstanding July 1, 1997     2,040,966    $    7.83     476,679    $      2.93
     Granted ............      780,951        16.12        --          --
     Exercised ..........      (89,230)        4.26     (93,724)         2.93
     Canceled ...........      (22,713)       11.99         --         --
                             ----------                --------
Outstanding June 30, 1998    2,709,914        10.30     382,955          2.93
     Exercised ..........     (113,176)        6.10     (43,789)         2.94
     Canceled ...........      (44,531)       14.22        --          --
                             ---------                ----------
Outstanding June 30, 1999    2,552,267        10.42     339,166           2.93
     Granted ............    1,026,695        17.25        --           --
     Exercised ..........     (117,637)        6.91    (216,381)          2.95
     Canceled ...........      (17,018)       15.63      --             --
                            ----------                ----------
Outstanding June 30, 2000    3,444,307        12.55   122,785             2.90
                            ==========                ==========     =========

</TABLE>

The following table summarizes information about stock options outstanding under
the 1992 Plan at June 30, 2000:
<TABLE>
<CAPTION>

              Options Outstanding                                Options Exercisable
                             Weighted Average    Weighted         Weighted
  Range of        Number of    Remaining         Average        Number of     Average
Exercise Prices    Options  Contractual Life   Exercise Price    Options   Exercise Price
<S>     <C>    <C>    <C>    <C>    <C>    <C>

$ 0.00 - $ 5.00    344,761    2.3 years         $ 3.67           344,761     $   3.67
  5.01 -  10.00    862,122    4.3 years           7.50           719,558         7.34
 10.01 -  15.00    475,084    6.8 years          12.47           288,549        12.44
 15.01 -  20.00  1,762,340    8.8 years          16.78           293,755        16.13
                 3,444,307                                      1,646,623
                 =========                                      =========
</TABLE>

The shares exercisable under the 1992 Plan and the corresponding weighted
average exercise price at June 30, 2000, 1999 and 1998 were 1,646,623 and $9.03;
1,426,417 and $7.89; and 1,084,224 and $6.26, respectively. The shares
exercisable under the 1982 Plan and the corresponding weighted average exercise
price at June 30, 2000, 1999 and 1998 were 122,785 and $2.90; 339,167 and $2.93;
and 382,958 and $2.93, respectively. The shares exercisable under the
Pennsylvania Option Plan and the corresponding weighted average exercise price
at June 30, 2000 were 378,002 and $11.09. The shares exercisable under the
Pennsylvania Incentive Plan and the corresponding weighted average exercise
price at June 30, 2000 were 168,913 and $12.69. The weighted average


<PAGE>



                     SOUTHERN UNION COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



remaining contractual life of options outstanding under the 1982 Plan at June
30, 2000 was 0.4 years. The weighted average remaining contractual life of
options outstanding under the Pennsylvania Option Plan and the Pennsylvania
Incentive Plan at June 30, 2000 were 6 and 7.9 years, respectively. There were
3,074,674 shares available for future option grants under the 1992 Plan at June
30, 2000. No shares were available for future option grants under the 1982 Plan
at June 30, 2000.

On February 10, 1994, Southern Union granted a warrant which expires on February
10, 2004, to purchase up to 105,531 shares of Common Stock at an exercise price
of $6.58 to the Company's outside legal counsel.

Retained Earnings Under the most restrictive provisions in effect, as a result
of the sale of Senior Notes, Southern Union will not declare or pay any cash or
asset dividends on common stock (other than dividends and distributions payable
solely in shares of its common stock or in rights to acquire its common stock)
or acquire or retire any shares of Southern Union's common stock, unless no
event of default exists and the Company meets certain financial ratio
requirements. In addition, Southern Union's charter relating to the issuance of
preferred stock limits the payment of cash or asset dividends on capital stock.

                   XI Preferred Securities of Subsidiary Trust

On May 17, 1995, Southern Union Financing I (Subsidiary Trust), a consolidated
wholly-owned subsidiary of Southern Union, issued $100,000,000 of 9.48% Trust
Originated Preferred Securities (Preferred Securities). In connection with the
Subsidiary Trust's issuance of the Preferred Securities and the related purchase
by Southern Union of all of the Subsidiary Trust's common securities (Common
Securities), Southern Union issued to the Subsidiary Trust $103,092,800
principal amount of its 9.48% Subordinated Deferrable Interest Notes, due 2025
(Subordinated Notes). The sole assets of the Subsidiary Trust are the
Subordinated Notes. The interest and other payment dates on the Subordinated
Notes correspond to the distribution and other payment dates on the Preferred
Securities and the Common Securities. Under certain circumstances, the
Subordinated Notes may be distributed to holders of the Preferred Securities and
holders of the Common Securities in liquidation of the Subsidiary Trust. The
Subordinated Notes were redeemable at the option of the Company on or after May
17, 2000, at a redemption price of $25 per Subordinated Note plus accrued and
unpaid interest. The Preferred Securities and the Common Securities will be
redeemed on a pro rata basis to the same extent as the Subordinated Notes are
repaid, at $25 per Preferred Security and Common Security plus accumulated and
unpaid distributions. Southern Union's obligations under the Subordinated Notes
and related agreements, taken together, constitute a full and unconditional
guarantee by Southern Union of payments due on the Preferred Securities. As of
June 30, 2000, the quoted market price per Preferred Security was $24.31. As of
June 30, 2000 and 1999, 4,000,000 shares of Preferred Securities were
outstanding.

                           XII Debt and Capital Lease

                                               June 30,
                                           2000       1999
                                          ------------------

7.60% Senior Notes due 2024 ..........   $364,515   $364,515
8.25% Senior Notes due 2029 ..........    300,000       --
8.375% First Mortgage Bonds, due 2002      30,000       --
9.34% First Mortgage Bonds, due 2019 .     15,000       --
Capital lease and other ..............     26,452     28,482
                                         --------   --------
Total debt and capital lease .........    735,967    392,997
    Less current portion .............      2,193      2,066
                                         --------   --------

Total long-term debt and capital lease   $733,774   $390,931
                                         ========   ========


The maturities of long-term debt and capital lease payments for each of the next
five years ending June 30 are: 2001 -- $2,193,000; 2002 -- $2,330,000; 2003 --
$42,660,000; 2004 -- $8,871,000; 2005 -- $216,000 and thereafter --
$679,697,000.


<PAGE>



                     SOUTHERN UNION COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




Senior Notes On November 3, 1999, the Company completed the sale of $300,000,000
of 8.25% Senior Notes (8.25% Notes) due 2029. The net proceeds from the sale of
these 8.25% Notes were used to: (i) fund the acquisition of Pennsylvania
Enterprises, Inc.; (ii) repay approximately $109,900,000 of borrowings under the
revolving credit facility, and (iii) repay approximately $136,000,000 of long-
and short-term debt assumed in the acquisition. On January 31, 1994, Southern
Union also completed the sale of the 7.60% Senior Debt Securities (7.60% Notes).
During 1999, $20,000,000 of 7.60% Notes were repurchased at $941 per $1,000 note
resulting in a net pre-tax gain of $425,000, net of related debt expense. Debt
issuance costs and premiums on the early extinguishment of debt are accounted
for in accordance with that required by its various regulatory bodies having
jurisdiction over the Company's operations. The Company recognizes gains or
losses on the early extinguishment of debt to the extent it is provided for by
its regulatory authorities and in some cases such gains or losses are deferred
and amortized over the term of the new or replacement debt issues.

The 8.25% Notes and the 7.60% Notes traded at $983 and $918 (per $1,000 note),
respectively on June 30, 2000, as quoted by a major brokerage firm. The carrying
amount of long-term debt at June 30, 2000 and 1999 was $735,967,000 and
$392,997,000, respectively. The fair value of long-term debt at June 30, 2000
and 1999 was $700,934,000 and $369,759,000, respectively.

First Mortgage Bonds In connection with the acquisition of the Pennsylvania
Operations, the Company assumed $30,000,000 of 8.375% Series First Mortgage
Bonds due in December 2002 and $15,000,000 of 9.34% Series First Mortgage Bonds
due in 2019.

Capital Lease The Company completed the installation of an Automated Meter
Reading (AMR) system at Missouri Gas Energy during the first quarter of fiscal
year 1999. The installation of the AMR system involved an investment of
approximately $30,000,000 which is accounted for as a capital lease obligation.
As of June 30, 2000, the capital lease obligation outstanding was $25,104,000
with a fixed rate of 5.79%. This system has significantly improved meter reading
accuracy and timeliness and provided electronic accessibility to meters in
residential customers' basements, thereby assisting in the reduction of the
number of estimated bills. Depreciation on the AMR system is provided at an
average straight-line rate of approximately 5% per annum of the cost of such
property.

Credit Facilities On May 31, 2000, the Company restated and amended its
short-term and long-term credit facilities (together referred to as "Revolving
Credit Facilities"). The Company has available $90,000,000 under the short-term
facility, which expires May 30, 2001, and $135,000,000 under the long-term
facility, which expires on May 31, 2003. The Company has additional availability
under uncommitted line of credit facilities (Uncommitted Facilities) with
various banks. Borrowings under the facilities are available for Southern
Union's working capital, letter of credit requirements and other general
corporate purposes. The Revolving Credit Facilities are subject to a commitment
fee based on the rating of the Senior Notes. As of June 30, 2000, the commitment
fee was an annualized 0.14% on the unused balance. The interest rate on
borrowings on the Revolving Credit Facilities is calculated based on a formula
using the LIBOR or prime interest rates. The average interest rate under the
facilities was 6.0% for the year ended June 30, 2000 and 5.6% for the year ended
June 30, 1999. A nil and $21,000,000 balance was outstanding under the
facilities at June 30, 2000 and 1999, respectively. A balance of $26,320,000 was
outstanding under the facilities at August 31, 2000.

On August 28, 2000 the Company entered into a short-term bank note (the Term
Note) to fund (i) the cash portion of the consideration to be paid to the Fall
River Gas' stockholders; (ii) the all cash consideration to be paid to the
ProvEnergy and Valley Resources stockholders, and (iii) all related acquisition
costs and refinancing of debt done in connection with these mergers. In
September 2000, draws totaling $480,000,000 were made under this Term Note.
Remaining commitments under the Term Note are $95,000,000 as of September 28,
2000 to cover any trailing costs. The Term Note expires August 27, 2001 but may
be extended at the Company's option through August 26, 2002 for a 12.5 basis
point fee. The interest rate on borrowings under the Term Note is a floating
rate based on LIBOR or prime interest rates.


<PAGE>



                     SOUTHERN UNION COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



                             XIII Employee Benefits

Pension and Other Post-retirement Benefits The Company adopted in 1999,
Employers Disclosures About Pensions and Other Post-Retirement Benefits, a FASB
standard which changed the Company's reporting requirements for its pension and
post-retirement benefit plans.

The Company maintains three trusteed non-contributory defined benefit retirement
plans (Plans) which cover substantially all employees. The Company funds the
Plans' cost in accordance with federal regulations, not to exceed the amounts
deductible for income tax purposes. The Plans' assets are invested in cash,
government securities, corporate bonds and stock, and various funds. The Company
also has a supplemental non-contributory retirement plan for certain executive
employees and other post-retirement benefit plans for its employees.
Post-retirement medical and other benefit liabilities are accrued on an
actuarial basis during the years an employee provides services. The following
table represents a reconciliation of the plans at June 30, 2000 and 1999.

                                                          2000         1999
                                                       ------------------------
Change in Benefit Obligation
     Benefit obligation at beginning of year .......   $ 204,461    $ 188,038
     Acquisition ...................................      54,261         --
     Service cost ..................................       2,251        3,364
     Interest cost .................................      16,265       13,829
     Benefits paid .................................     (17,798)     (13,563)
     Actuarial (gain) loss .........................     (20,452)       7,968
     Plan amendments ...............................       8,115        7,027
     Curtailment ...................................        --         (2,202)
                                                       ---------    ---------

     Benefit obligation at end of year .............   $ 247,103    $ 204,461
                                                       =========    =========

Change in Plan Assets
     Fair value of plan assets at beginning of year    $ 162,621    $ 166,353
     Acquisition ...................................      50,657         --
     Return on plan assets .........................      21,499        3,420
     Employer contributions ........................       7,445        6,411
     Benefits paid .................................     (17,798)     (13,563)
                                                       ---------    ---------

     Fair value of plan assets at end of year ......   $ 224,424    $ 162,621
                                                       =========    =========


Funded Status
     Funded status at end of year ..................   $ (22,679)   $ (41,839)
     Unrecognized transition obligation ............       2,637        2,764
     Unrecognized net actuarial gain ...............     (31,417)      (7,404)
     Unrecognized prior service cost ...............      17,080        9,913
                                                       ---------    ---------

     Accrued benefit cost ..........................   $ (34,379)   $ (36,566)
                                                       =========    =========


Amounts Recognized in the Consolidated Balance Sheet
     Prepaid benefit cost ..........................   $  11,738    $   4,880
     Accrued benefit liability .....................     (62,498)     (52,618)
     Intangible asset ..............................      16,381       10,501
     Accumulated other comprehensive income ........        --            671
                                                       ---------    ---------

     Net amount recognized .........................   $(34,379)    $ (36,566)
                                                       =========    =========


The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for pension plans with accumulated benefit obligations in excess
of plan assets as of June 30, 2000 were $19,492,000; $19,492,000; and


<PAGE>



                     SOUTHERN UNION COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



nil, respectively, and for those same plans were $58,985,000; $58,985,000; and
$42,181,000, respectively as of June 30, 1999.

The accumulated post-retirement benefit obligation and fair value of plan assets
for post-retirement benefit plans with accumulated post-retirement benefit
obligations in excess of fair value of plan assets as of June 30, 2000 were
$45,920,000 and $7,859,000 respectively, and for those same plans were
$38,035,000 and $3,878,000, respectively as of June 30, 1999.

The weighted-average assumptions used for the year ended June 30, 2000, 1999 and
1998 were:

                                                     2000    1999    1998
Discount rate
     Beginning of year ........................      7.00%   7.00%   7.75%
     End of year ..............................      8.00%   7.00%   7.00%
Expected return on assets - tax exempt accounts      8.00%   8.00%   8.00%
Expected return on assets - taxable accounts ..      5.25%   5.25%   8.00%
Rate of compensation increase (average) .......      5.62%   5.62%   5.62%
Health care cost trend rate ...................      9.00%   7.25%   7.50%

Net periodic benefit cost for the year ended June 30, 2000, 1999 and 1998
includes the following components:

                                                   2000     1999        1998

Service cost  ................................   $ 2,251  $  3,364    $  3,302
Interest cost ................................    16,265    13,829      13,658
Expected return on plan assets ...............   (14,554)  (13,006)    (11,737)
Amortization of transition amount ............       127       127         127
Amortization of prior service cost ...........       948       438         340
Recognized actuarial gain ....................    (2,704)   (3,319)     (4,828)
Curtailment ..................................        --       131          --
                                                 --------    --------    ------
Net periodic pension cost ....................   $  2,333    $1,564      $  862
                                                 ========    ========    ======

The assumed health care cost trend rate used in measuring the accumulated
post-retirement benefit obligation was 9.00% during 2000. This rate was assumed
to decrease gradually each year to a rate of 6.0% for 2003 and remain at that
level thereafter. For Pennsylvania's participants in the HMO plan who have
reached age 65, the assumed health care cost trend rate used was 30.0% and it
was assumed to decrease gradually to 6.0% by 2006. (The health care cost trend
rate of 30.0% is due to increases in HMO premium rates experienced in 2000.)

Amortization of unrecognized actuarial gains and losses for Missouri Gas Energy
plans were determined using a rolling five year average gain or loss position
with a five year amortization period pursuant to a stipulation agreement with
the MPSC.

Effect of health care trend rate changes on health care plans:
<TABLE>
<CAPTION>

                                                                        One Percentage Point        One Percentage Point
                                                                       Increase in Health Care    Decrease in Health Care
                                                                              Trend Rate                 Trend Rate
<S>     <C>    <C>    <C>    <C>    <C>    <C>

Effect on total service and interest cost components..............         $      40,000                $     (36,000)
Effect on post-retirement benefit obligation......................               599,000                     (561,000)


</TABLE>


<PAGE>



         SOUTHERN UNION COMPANY AND SUBSIDIARIES
     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



The Company's three qualified defined benefit retirement Plans cover (i) those
Company employees who are not employed by Missouri Gas Energy or the
Pennsylvania Operations; (ii) those employees who are employed by Missouri Gas
Energy; and (iii) those employees who are employed by the Pennsylvania
Operations. On December 31, 1998, the Plans covering (i) and (ii) above,
exclusive of Missouri Gas Energy's union employees, were converted from the
traditional defined benefit Plans with benefits based on years of service and
final average compensation to cash balance defined benefit plans in which an
account is maintained for each employee. The initial value of the account was
determined as the actuarial present value (as defined in the Plans) of the
benefit accrued at transition (December 31, 1998) under the pre-existing
traditional defined benefit plan. Future contribution credits to the accounts
are based on a percentage of future compensation, which varies by individual.
Interest credits to the accounts are based on 30-year Treasury bond yields.

Defined Contribution Plan The Company provides a Savings Plan available to all
employees. Since January 1, 1997, the Company had contributed $.50 of Company
stock for each $1.00 contributed by a non-Missouri Gas Energy participant up to
5% of the employee's salary. Additionally, the Company contributes $.75 of
Company stock for each $1.00 contributed by a non-Missouri Gas Energy
participant from 6% to 10% of the employee's salary. Effective July 1, 1998,
Company contributions for Missouri Gas Energy non-union employees were revised
to coincide with that of non-Missouri Gas Energy participants as described
above. For Missouri Gas Energy union employees, the Company contributes $.50 of
Company stock for each $1.00 contributed by such a participant up to 7% of the
employee's salary. In Pennsylvania, the Company contributes 40% of the first 4%
of the participant's compensation paid into the Savings Plan for all
participants, other than those employed by Keystone. The matching contribution
for Keystone participants is equal to 50% of the first 4% of the participant's
compensation paid into the Savings Plan. Company contributions are 100% vested
after five years of continuous service. Company contributions to the plan during
2000, 1999 and 1998, were $2,034,000, $1,717,000 and $1,656,000, respectively.

Effective January 1, 1999 the Company amended its defined contribution plan to
provide contributions for certain employees who were employed as of December 31,
1998. These contributions were designed to replace certain benefits previously
provided under defined benefit plans. Employer contributions to these separate
accounts, referred to as Retirement Power Accounts, within the defined
contribution plan were determined based on the employee's age plus years of
service plus accumulated sick leave as of December 31, 1998. The contribution
amounts are determined as a percentage of compensation and range from 3.5% to
8.5%. Company contributions to Retirement Power Accounts during 2000 and 1999
were $2,281,000 and $1,118,000, respectively.

Post-employment Benefits Certain post-employment benefits such as disability and
health care continuation coverage provided to former or inactive employees after
employment but before retirement, are accrued if attributable to an employees'
previously rendered service. The Company has recorded a regulatory asset to the
extent it intends to file rate applications to include such costs in rates and
such recovery is probable. As of both June 30, 2000 and 1999, the Company has
recorded a regulatory asset and a related liability of $1,343,000.

Common Stock Held in Trust From time to time, the Company purchases outstanding
shares of common stock of Southern Union to fund certain Company employee
stock-based compensation plans. At June 30, 2000 and 1999, 942,395 and 281,939
shares, respectively, of common stock were held by various rabbi trusts for
certain of the Company's benefit plans. During 2000 certain employees deferred
receipt of Company shares for stock options exercised. At June 30, 2000, 22,182
shares were held in a rabbi trust for these employees.




<PAGE>



         SOUTHERN UNION COMPANY AND SUBSIDIARIES
     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



                               XIV Taxes on Income

                         Year Ended June 30,
                    2000       1999       1998
                           (Restated)
Current:
     Federal ..   $ 6,640    $  (516)   $ 1,381
     State ....       345       (242)       240
---------------   -------    -------    -------
                    6,985       (758)     1,621
Deferred:
     Federal ..     1,857      7,024      5,984
     State ....       747        843        379
---------------   -------    -------    -------
                    2,604      7,867      6,363
---------------   -------    -------    -------

Total provision   $ 9,589    $ 7,109    $ 7,984
                  =======    =======    =======

Deferred credits and other liabilities also include $524,000 and $560,000 of
unamortized deferred investment tax credit as of June 30, 2000 and 1999,
respectively.

Deferred income taxes result from temporary differences between the financial
statement carrying amounts and the tax basis of existing assets and liabilities.

                                                       June 30,
                                                  2000         1999
                                                     (Restated)
Deferred tax assets:
     Estimated alternative minimum tax credit   $  21,389    $   9,557
     Insurance accruals .....................       1,100        2,297
     Bad debt reserves ......................       1,135        2,715
     Post-retirement benefits ...............       1,888        1,466
     Minimum pension liability ..............        --            234
     Other ..................................      11,118        3,020
                                                ---------    ---------
         Total deferred tax assets ..........      36,630       19,289
                                                ---------    ---------
Deferred tax liabilities:
     Property, plant and equipment ..........    (123,907)     (74,909)
     Unamortized debt expense ...............      (4,732)      (5,049)
     Deferred state and local taxes .........     (12,289)      (3,950)
     Regulatory liability ...................      (8,769)        --
     Unrealized holding gain on securities ..     (62,017)        --
     Other ..................................      (7,336)     (2,781)
                                                ---------    ---------

         Total deferred tax liabilities .....    (219,050)    (86,689)
                                                ---------    ---------

Net deferred tax liability ..................    (182,420)     (67,400)
Less current tax assets .....................       1,090        2,838
                                                ---------    ---------

Accumulated deferred income taxes ...........   $(183,510)   $ (70,238)
                                                =========    =========





<PAGE>



     SOUTHERN UNION COMPANY AND SUBSIDIARIES
     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



The Company accounts for income taxes utilizing the liability method which bases
the amounts of current and future tax assets and liabilities on events
recognized in the financial statements and on income tax laws and rates existing
at the time the temporary differences are expected to reverse.
<TABLE>
<CAPTION>

                                                                       Year Ended June 30,
                                                                    2000     1999         1998
                                                                          (Restated)
<S>     <C>    <C>    <C>    <C>    <C>    <C>

Computed statutory tax expense at 35% ........................   $ 6,802    $ 6,144    $ 7,075
Changes in taxes resulting from:
     State income taxes, net of federal income tax benefit ...       710        348        402
     Amortization of acquisition adjustment ..................     2,311        830        723
     Other ...................................................      (234)      (213)      (216)
--------------------------------------------------------------   -------    -------    --------

Actual tax expense ...........................................   $ 9,589    $ 7,109    $ 7,984
==============================================================   =======    =======    ========

</TABLE>

                         XV Utility Regulation and Rates

On April 3, 2000, PG Energy filed an application with the PPUC seeking an
increase in its base rates designed to produce $17,900,000 in additional annual
revenues, to be effective June 2, 2000. On May 11, 2000, the PPUC suspended this
rate increase request for seven months, until January 2, 2001, in order to
investigate the reasonableness of the proposed rates. On August 30, 2000, PG
Energy and the principal parties to the base rate proceeding informed the
Administrative Law Judge (ALJ) assigned to the proceeding that a complete
settlement of the proceeding had been reached. The proposed settlement is
designed to produce $10,800,000 of additional annual revenue. The parties are
currently in the process of finalizing a Settlement Agreement and Joint Petition
for Settlement of Rate Investigation (the Settlement Petition) which will be
filed with the ALJ upon its completion. The Settlement Petition will request
PPUC approval for the rate increase to become effective on January 1, 2001. It
is not presently possible to determine what action either the ALJ or the PPUC
will ultimately take with respect to this rate increase request or the
Settlement Petition.

On October 18, 1999, Southern Union Gas filed a $1,696,000 rate increase request
for the El Paso service area with the City of El Paso. In February 2000, the
City of El Paso approved a $650,000 revenue increase, and an improved rate
design that collects a greater portion of the Company's revenue stream from the
monthly customer charge. Additionally, the City of El Paso approved a new
30-year franchise for Southern Union Gas.

On August 21, 1998, Missouri Gas Energy was notified by the MPSC of its decision
to grant a $13,300,000 annual increase to revenue effective on September 2,
1998, which is primarily earned volumetrically. The MPSC rate order reflected a
10.93% return on common equity. The rate order, however, disallowed certain
previously recorded deferred costs requiring a non-cash write-off of $2,221,000.
The Company recorded this charge to earnings in its fiscal year ended June 30,
1998. On December 8, 1998, the MPSC denied rehearing requests made by all
parties other than Missouri Gas Energy and granted a portion of Missouri Gas
Energy's rehearing request. On June 15, 2000, the MPSC ruled that it would not
rehear or reconsider its decision on one issue valued at $1,500,000. If the MPSC
adopts Missouri Gas Energy's positions on rehearing, then Missouri Gas Energy
would be authorized an additional $700,000 of base revenues increasing the
$13,300,000 initially authorized in its August 21, 1998 order to $14,000,000.
The MPSC is expected to rule on this rehearing in October 2000. The MPSC's
orders may be subject to judicial review and although certain parties may argue
for a reduction in Missouri Gas Energy's authorized base revenue increase on
judicial review, Missouri Gas Energy expects such arguments to be unsuccessful.

On April 13, 1998, Southern Union Gas filed a $2,228,000 request for a rate
increase from the city of El Paso, a request the city subsequently denied. On
April 21, 1998, the city council of El Paso voted to reduce the Company's rates
by $1,570,000 annually and to order a one-time cost of gas refund of $475,000.
On May 21, 1998, Southern Union Gas filed with the Railroad Commission of Texas
(RRC) an appeal of the city of El Paso's actions to reduce the Company's rates
and require a one-time cost of gas refund. On December 21, 1998, the RRC issued
its order


<PAGE>



         SOUTHERN UNION COMPANY AND SUBSIDIARIES
     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



implementing an $884,000 one-time cost of gas refund and a $99,000 base rate
reduction. The cost of gas refund was completed in February 1999.

On January 22, 1997, Missouri Gas Energy was notified by the MPSC of its
decision to grant an $8,847,000 annual increase to revenue effective on February
1, 1997. See Commitments and Contingencies.

The MPSC approved a three-year, experimental gas supply incentive plan for
Missouri Gas Energy effective July 1, 1996. Under the plan, the Company and
Missouri Gas Energy's customers shared in certain savings below benchmark levels
of gas costs achieved as a result of the Company's gas procurement activities.
Likewise, if natural gas was acquired above benchmark levels, both the Company
and customers shared in such costs. For the years ended June 30, 1999 and 1998,
the incentive plan achieved a reduction of overall gas costs of $6,900,000 and
$9,200,000, respectively, resulting in savings to Missouri customers of
$4,000,000 and $5,100,000, respectively. The Company recorded revenues of
$2,900,000 and $4,100,000 in 1999 and 1998, respectively, under this plan.
Missouri Gas Energy received authorization from the MPSC for a new gas supply
incentive plan that became effective August 31, 2000. Earnings under the plan
are primarily dependent on market prices for natural gas declining to certain
preauthorized levels which are now below current market prices. There is no
assurance that the Company will have an opportunity to generate earnings under
this aspect of the plan during fiscal 2001.

Under the order of the Federal Energy Regulatory Commission, a major supplier of
gas to Missouri Gas Energy is allowed recovery of certain previously unrecovered
deferred gas costs with a remaining balance of nil and $669,000 at June 30, 2000
and 1999, respectively. Missouri Gas Energy is allowed to recover these costs
from its Missouri customers through a purchase gas adjustment mechanism which is
filed with and approved by the MPSC. The receivable and liability associated
with these costs have been recorded as a deferred charge and a deferred credit,
respectively, on the consolidated balance sheet as of June 30, 2000 and 1999.

As a result of the January 31, 1994 acquisition of Missouri Gas Energy, the MPSC
required Missouri Gas Energy to reduce rate base by $30,000,000 to compensate
Missouri rate payers for rate base reductions that were eliminated as a result
of the acquisition. This is being amortized over a ten-year period on a
straight-line basis since the date of acquisition.

     XVI      Leases

The Company leases certain facilities, equipment and office space under
cancelable and noncancelable operating leases. The minimum annual rentals under
operating leases for the next five years ending June 30 are as follows: 2001 --
$7,513,000; 2002 -- $6,322,000; 2003 -- $16,905,000; 2004 -- $3,999,000; 2005 --
$4,052,000 and thereafter $10,862,000. Rental expense was $10,384,000,
$7,732,000 and $6,054,000 for the years ended June 30, 2000, 1999 and 1998,
respectively.

     XVII      Commitments and Contingencies

Environmental The Company is subject to federal, state and local laws and
regulations relating to the protection of the environment. These evolving laws
and regulations may require expenditures over a long period of time to control
environmental impacts. The Company has established procedures for the on-going
evaluation of its operations to identify potential environmental exposures and
assure compliance with regulatory policies and procedures.

The Company is investigating the possibility that the Company or predecessor
companies may have been associated with Manufactured Gas Plant (MGP) sites in
its former service territories, principally in Arizona and New Mexico, and
present service territories in Texas, Missouri and its newly acquired service
territories in Pennsylvania. At the present time, the Company is aware of
certain MGP sites in these areas and is investigating those and certain other
locations. While the Company's evaluation of these Texas, Missouri, Arizona, New
Mexico and Pennsylvania MGP sites is in


<PAGE>



         SOUTHERN UNION COMPANY AND SUBSIDIARIES
     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



its preliminary stages, it is likely that some compliance costs may be
identified and become subject to reasonable quantification. Certain MGP sites
located within the Company's service territories are currently the subject of
governmental actions. These sites are as follows:

Kansas City, Missouri MGP Sites In a letter dated May 10, 1999, the Missouri
Department of Natural Resources (MDNR) sent notice of a planned Site
Inspection/Removal Site Evaluation of the Kansas City Coal Gas Former
Manufactured Gas Plant site. This site (comprised of two adjacent MGP operations
previously owned by two separate companies and hereafter referred to as Station
A and Station B) is located at East 1st Street and Campbell in Kansas City,
Missouri and is owned by Missouri Gas Energy. A 1988 investigation of the site
performed by an Environmental Protection Agency (EPA) contractor determined that
further remedial assessment was not required under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 (CERCLA), as
amended by the SUPERFUND Amendments and Reauthorization Act of 1986. The MDNR
has stated that the reassessment of the Kansas City Coal Gas site is part of a
statewide effort to identify, evaluate, and prioritize the potential hazards
posed by all of Missouri's MGP sites. During July 1999, the Company sent
applications to MDNR submitting the two sites to the agency's Voluntary Cleanup
Program. The sites were accepted into the VCP on August 2, 1999 and MDNR
subsequently approved the Company's proposed workplans for the environmental
assessment of the sites. The final environment reports were sent to the state on
March 6, 2000. In a letter dated June 21, 2000, MDNR responded to the Station A
environmental report submitted by the Company. In that letter, MDNR stated that
soil remediation will be necessary at the site (Station A) but that further
exploration and delineation of site contamination should be performed before
remedial methods can be determined. MDNR has requested that the Company submit a
work plan for further investigation of the site. MDNR has not responded to the
Station B environmental report submitted by the Company.

Independence, Missouri MGP Site The Company received a letter dated December 16,
1999 from MDNR notifying the Company of a Pre-CERCLIS Site Screening
investigation of a former manufactured gas plant located at Pacific Avenue &
South River Boulevard in Independence, Missouri. The Company contacted the MDNR
to inform the state that, as this property is not owned by the Company, it
cannot grant access to the property for MDNR's investigation. MDNR proceeded to
investigate the site in cooperation with the site's current owner. In a letter
dated May 17, 2000, MDNR reported that the site is not recommended for CERCLIS
(Comprehensive Environmental Response, Compensation and Liability Information
System) entry and no futther CERCLA action is recommended. However, due to the
presence of characteristic waste, the site is eligible for the state's Registry
of Confirmed Abandoned or Uncontrollable Hazardous Waste Disposal Sites in
Missouri.

To the extent that potential costs associated with former manufactured gas
plants are quantified, the Company expects to provide any appropriate accruals
and seek recovery for such remediation costs through all appropriate means,
including insurance and regulatory relief. In addition, at the time of the
closing of the acquisition of the Company's Missouri service territories, the
Company entered into an Environmental Liability Agreement that provides that
Western Resources retains financial responsibility for certain liabilities under
environmental laws that may exist or arise with respect to Missouri Gas Energy.

Although significant charges to earnings could be required prior to rate
recovery, management does not believe that environmental expenditures for MGP
sites will have a material adverse effect on the Company's financial position,
results of operations or cash flows.

The Company follows the provisions of an American Institute of Certified Public
Accountants Statement of Position, Environmental Remediation Liabilities, for
recognition, measurement, display and disclosure of environmental remediation
liabilities.

Regulatory On August 18, 1998, the Missouri State Court of Appeals, Western
District, denied the Company's appeal of the February 1, 1997 rate order which
retroactively reduced the carrying cost rate applied by the Company on
expenditures incurred on the Missouri Gas Energy Safety Program. The Company
believes that the inconsistent


<PAGE>



         SOUTHERN UNION COMPANY AND SUBSIDIARIES
     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



treatment by the MPSC in subsequently changing to the Allowance for Funds Used
During Construction rate of approximately 6% from the previously ordered rate of
10.54% constitutes retroactive ratemaking. Unfortunately, the decision by the
Missouri State Court of Appeals failed to address certain specific language
within a 1994 MPSC accounting authority order that the Company believed
prevented the MPSC from retroactively changing the carrying cost rate. Southern
Union sought a transfer of the case to the Missouri Supreme Court which was
denied on November 24, 1998.

The continuation of the Missouri Safety Program will result in significant
levels of future capital expenditures. The Company estimates incurring capital
expenditures of $15,631,000 in fiscal 2001 related to this program.

In August 1998, a jury in Edinburg, Texas concluded deliberations on the City of
Edinburg's franchise fee lawsuit against PG&E Gas Transmission, Texas
Corporation (formerly Valero Energy Corporation (Valero)) and a number of its
subsidiaries, as well as former Valero subsidiary Rio Grande Valley Gas Company
(RGV) and RGV's successor company, Southern Union Company. The case, based upon
events that occurred between 1985-1987, centers on specific contractual language
in the 1985 franchise agreement between RGV and the City of Edinburg. Southern
Union purchased RGV from Valero in October 1993. The jury awarded the plaintiff
damages, against all defendants under several largely overlapping but mutually
exclusive claims, totaling approximately $13,000,000. The trial judge
subsequently reduced the award to approximately $700,000 against Southern Union
and $7,800,000 against Valero and Southern Union together. The Company is
pursuing reversal on appeal. The Company believes it will ultimately prevail,
and that the outcome of this matter will not have a material adverse impact on
the Company's results of operations, financial position or cash flows.
Furthermore, the Company has not determined what impact, if any, this jury
decision may have on other city franchises in Texas.

Southwest Gas Litigation On February 1, 1999, Southern Union submitted a
proposal to the Board of Directors of Southwest Gas Corporation (Southwest) to
acquire all of Southwest's outstanding common stock for $32.00 per share.
Southwest then had a pending merger agreement with ONEOK, Inc. (ONEOK) at $28.50
per share. On February 22, 1999, Southern Union and Southwest both publicly
announced Southern Union's proposal, after the Southwest Board of Directors
determined that Southern Union's proposal was a Superior Proposal (as defined in
the Southwest merger agreement with ONEOK). At that time Southern Union entered
into a Confidentiality and Standstill Agreement with Southwest at Southwest's
insistence. On April 25, 1999, Southwest's Board of Directors rejected Southern
Union's $32.00 per share offer and accepted an amended offer of $30.00 per share
from ONEOK. On April 27, 1999, Southern Union increased its offer to $33.50 per
share and agreed to pay interest which, together with dividends, would provide
Southwest shareholders with a 6% annual rate of return on its $33.50 offer,
commencing February 15, 2000, until closing. Southern Union's revised proposal
was rejected by Southwest's Board of Directors. On January 21, 2000, ONEOK
announced that it was withdrawing from the Southwest merger agreement.

There are several lawsuits pending that relate to activities surrounding
Southern Union's efforts to acquire Southwest. In addition, there is before the
U.S. Court of Appeals for the Tenth Circuit, an appeal by Southern Union of a
preliminary injunction entered by the U.S. District Court for the Northern
District of Oklahoma. Southern Union intends to vigorously pursue its claims
against Southwest, ONEOK, and certain individual defendants, and vigorously
defend itself against the claims by Southwest and ONEOK.

     California Action -- Arthur Klein, et al. v. Southwest Gas Corporation,  et
al.,  Southern Union Company,  Intervenor,  Case No. 726615  (Superior  Court of
California,  County of San Diego) On  September  24, 1999,  the court  dismissed
Southern  Union's  claims  against  Southwest  Gas without  prejudice,  allowing
Southern  Union to  subsequently  refile the claims as of September  24, 1999 if
related federal court litigation does not resolve the claims.

     Nevada Action -- Southwest Gas Corporation v. Southern Union Company;  Case
No. CV-S-99-0530-JBR (U.S.D.C., District of Nevada) (transferred to the District
of Arizona to Case No. CIV-00-452-PHX-RGS) On April 20, 1999, Southwest filed an
action  against  Southern  Union in the  United  States  District  Court for the
District of Nevada.  The complaint  alleged  breach of the  Confidentiality  and
Standstill Agreement between Southern Union


<PAGE>



         SOUTHERN UNION COMPANY AND SUBSIDIARIES
     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



and Southwest, misappropriation of original trade secrets in violation of
California statutes, intentional interference with the ONEOK merger agreement,
intentional interference with prospective advantage, breach of a common-law duty
of good faith and fair dealing, and unfair business practices in violation of
California statutes. On May 6, 1999, Southwest filed an amended complaint that
added a claim for breach of the Securities Exchange Act of 1934 to the claims in
the original complaint. Southwest seeks declaratory and injunctive relief
together with money damages "in excess of $75,000.00." Southern Union has
answered the complaint, denying liability under all counts. Southern Union has
filed a counterclaim alleging breach of contract, breach of duty of good faith
and fair dealing, mistake of fact and fraudulent inducement with respect to the
Confidentiality and Standstill Agreement. The counterclaim seeks partial
rescission of the Confidentiality and Standstill Agreement and/or declaratory
relief. On March 8, 2000, the Nevada Court transferred this case to the District
of Arizona where it has been lodged before Judge Roger G. Strand as Case No.
CIV-00-452-PHX-RGS.

Oklahoma Action -- ONEOK, Inc. v. Southern Union Company; Case No.
99-CV-0345H(M) (U.S.D.C., Northern District of Oklahoma) On May 5, 1999, ONEOK
filed an action against Southern Union in the United States District Court for
the Northern District of Oklahoma, asserting third-party beneficiary status
under the Confidentiality and Standstill Agreement between Southern Union and
Southwest, and alleging a claim for breach of that Agreement as well as a claim
for intentional interference with the ONEOK-Southwest merger agreement. That
same day, ONEOK moved for a temporary restraining order against Southern Union
to bar Southern Union from making any attempt to solicit proxies from or
influence the shareholders of Southwest with respect to Southern Union's offer
to purchase Southwest, from taking any actions in the regulatory proceedings
that concern the proposed merger of ONEOK and Southwest, from taking any actions
in the Klein v. Southwest Gas Corp. case and from taking any actions to seek to
control or influence the shareholders, management, directors or policies of
Southwest, either alone or in concert with others. The court entered a
preliminary injunction on May 17, 1999. Southern Union has answered the
Complaint, denying liability under all counts. Southern Union has asserted a
counterclaim seeking declaratory judgment on enforceability of the
Confidentiality and Standstill Agreement and a declaration that Southern Union
has not breached the Confidentiality and Standstill Agreement. On September 12,
2000, the court entered an order transferring this case from the Northern
District of Oklahoma to the District of Arizona.

Appeal of Oklahoma Action -- ONEOK, Inc. v. Southern Union Company; Case No.
99-5103 (Tenth Circuit Court of Appeals) On May 17, 1999 Southern Union noticed
its appeal of the Oklahoma District Court's preliminary injunction in the United
States District Court of Appeals for the Tenth Circuit. On March 22, 2000, the
appellate court returned this matter to the district court for consideration of
whether the facts underlying ONEOK's original request for a preliminary
injunction have so materially changed that the need for injunctive relief
originally granted no longer exists.

Arizona Action -- Southern Union Company v. Southwest Gas Corporation; Case No.
CIV-99-1294-PHX-ROS (U.S.D.C., District of Arizona) On July 19, 1999, Southern
Union filed an action in the United States Court for the District of Arizona
(which was subsequently amended on October 11, 1999 and July 26, 2000). The
current defendants are Southwest, ONEOK, Michael O. Maffie (Southwest's
President), Thomas Y. Hartley (Southwest's Chairman), Eugene N. Dubay (President
of Kansas Gas Service, a division of ONEOK), James M. Irvin (an Arizona
Corporation Commissioner), Jack D. Rose (former Executive Director of the
Arizona Corporation Commission), John A. Gaberino (ONEOK's General Counsel) and
Mark D. Dioguardi (ONEOK's outside counsel). The suit alleges racketeering under
federal and state law, fraud in the inducement, breach of contract, Securities
Exchange Act violations, breach of the covenant of good faith and fair dealing,
rescission, intentional interference with business relationship, tortious
interference with contractual relations and civil conspiracy. Southern Union
seeks damages of $750 million on each of the two racketeering counts, to be
trebled; $750 million on six other counts; punitive damages on four counts; and
rescission of its Standstill Agreement with Southwest.

     Southwest Action in Arizona -- Southwest Gas Corporation v. ONEOK, Inc. and
Southern  Union  Company;  Case No.  CIV-00-119-PHX-ERC  (U.S.D.C.,  District of
Arizona) On January 21, 2000,  ONEOK announced its withdrawal from the Southwest
merger and filed a declaratory judgment action against Southwest. On January 24,


<PAGE>



         SOUTHERN UNION COMPANY AND SUBSIDIARIES
     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



2000, Southwest Gas filed an action in Arizona naming ONEOK and Southern Union
as defendants. The Complaint asserts claims against Southern Union for breach of
contract, breach of the implied covenant of good faith and fair dealing,
interference with contract, intentional interference with prospective economic
advantage, misappropriation of trade secrets and declaratory relief. Southwest
seeks damages against Southern Union in excess of $75,000 as well as exemplary
damages. Southern Union has answered the Complaint, denying liability under all
counts.

The Company believes that the results of the above-noted Southwest litigation
will not have a materially adverse effect on the Company's financial condition,
results of operations and cash flows.

Other Southern Union and its subsidiaries are parties to other legal proceedings
that management considers to be normal actions to which an enterprise of its
size and nature might be subject, and not to be material to the Company's
overall business or financial condition, results of operations or cash flows.

Commitments The Company is committed under various agreements to purchase
certain quantities of gas in the future. At June 30, 2000, the Company has
purchase commitments for certain quantities of gas at variable, market-based
prices that have an annual value of $113,666,000. The Company's purchase
commitments may extend over a period of several years depending upon when the
required quantity is purchased. The Company has purchase gas tariffs in effect
for all its utility service areas that provide for recovery of its purchase gas
costs under defined methodologies.

Due to the operation of purchase gas adjustment clauses, gas purchase costs
generally do not directly affect earnings of our regulated utility operations.
However, the Company's unregulated gas marketing operations are subject to price
risk related to fixed-price sales commitments that are not matched with
corresponding fixed-price purchase agreements. At June 30, 2000, the Company had
fixed-price sales commitments with various customers that provide for the
delivery of approximately 1,922,201 Dekatherms of natural gas through April 2001
at an average sales price per Dekatherm of $3.00. The Company has exposure to
the changes in gas prices related to fluctuating commodity prices, which can
impact the Company's financial position or results of operations, either
favorably or unfavorably. The Company's open positions are actively managed, and
the impact of changing prices on the Company's financial position at a point in
time is not necessarily indicative of the impact of price movements throughout
the year.

As a result of the unauthorized financial derivative energy trading activity, an
open contract of a non-regulated, wholly-owned subsidiary was present at June
30, 2000 for 10,000 MMBtu's of natural gas per day for the contract period of
January 2001 to December 2001 at a fixed price of $2.72 per MMBtu. The Company
had exposure to the changes in gas prices related to fluctuating commodity
prices, which can impact the Company's financial position or results of
operations, either favorably or unfavorably.

In connection with the acquisition of the Pennsylvania Operations, the Company
assumed a guaranty with a bank whereby the Company unconditionally guaranteed
payment of financing obtained for the development of PEI Power Park. In March
1999, the Borough of Archbald, the County of Lackawanna, and the Valley View
School District (together the Taxing Authorities) approved a Tax Incremental
Financing Plan (TIF Plan) for the development of PEI Power Park. The TIF Plan
requires that: (i) the Redevelopment Authority of Lackawanna County raise
$10,600,000 of funds to be used for infrastructure improvements of the PEI Power
Park; (ii) the Taxing Authorities create a tax increment district and use the
incremental tax revenues generated from new development to service the
$10,600,000 debt; and (iii) PEI Power Corporation, a subsidiary of the Company,
guarantee the debt service payments. In May 1999, the Redevelopment Authority of
Lackawanna County borrowed $10,600,000 from a bank under a promissory note (TIF
Debt). The TIF Debt has a 12-year term, with a 7.75% annual interest rate, and
requires semi-annual principal and interest payments of approximately $725,000
(interest only for the first year). As of June 30, 2000, incremental tax
revenues cover approximately 17% of the annual debt service. The balance
outstanding on the TIF Debt was $9,805,000 as of June 30, 2000.



<PAGE>



         SOUTHERN UNION COMPANY AND SUBSIDIARIES
     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



During fiscal 2000, the Company agreed to a one-year contract and a three-year
contract with each bargaining unit representing Pennsylvania employees, which
were effective on April 1, 2000 and August 1, 2000, respectively. In December
1998, the Company agreed to five-year contracts with each bargaining-unit
representing Missouri employees, which were effective in May 1999. Of the
Company's employees represented by unions, 95% are employed by Missouri Gas
Energy.

The Company had standby letters of credit outstanding of $6,199,000 and
$1,622,000 at June 30, 2000 and 1999, respectively, which guarantee payment of
various insurance premiums and state taxes.

                     XVIII Quarterly Operations (Unaudited)
<TABLE>
<CAPTION>

                     Year Ended                                  Quarter Ended
                    June 30, 2000              September 30   December 31   March 31     June 30(1)   Total (1)
                                             -------------  ------------   ----------- ------------  -----------
                                                                                          (Restated)  (Restated)
<S>     <C>    <C>    <C>    <C>    <C>    <C>

Total operating revenues .....................   $  84,786    $ 239,595   $ 344,789   $ 162,534    $ 831,704
Operating margin .............................      45,509       94,483     126,997      67,017      334,006
Net operating revenues .......................       1,807       30,897      52,902       4,508       90,114
Net earnings (loss) available for common stock      (6,100)       7,132      19,516     (10,703)       9,845
Earnings (loss) per share -- diluted(2) ......        (.19)         .16         .38        (.22)         .22

                     Year Ended                                  Quarter Ended
                   June 30, 1999               September 30   December 31   March 31      June 30        Total
                                             -------------  ------------   ----------- -------------- ------------

Total operating revenues .....................   $  77,455    $ 174,224   $ 251,863   $ 101,689    $ 605,231
Operating margin .............................      42,781       70,286      98,106      51,757      262,930
Net operating revenues (loss) ................        (627)      19,986      40,647       4,841       64,847
Net earnings (loss) available for common stock      (7,048)       5,374      17,624      (5,505)      10,445
Earnings (loss) per share -- diluted(2) ......        (.22)         .16         .51        (.17)         .31


</TABLE>

(1)  See Note II -- Restatement.
(2)  The sum of earnings per share by quarter may not equal the net earnings per
     common and common share equivalents for the year due to variations in the
     weighted average common and common share equivalents outstanding used in
     computing such amounts.


<PAGE>



                        REPORT OF INDEPENDENT ACCOUNTANTS



To the Stockholders and Board of Directors of
Southern Union Company:


In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, cash flows and stockholders' equity after
the restatement described in Note II, present fairly, in all material respects,
the financial position of Southern Union Company and its subsidiaries at June
30, 2000 and 1999, and the results of their operations and their cash flows for
each of the three years in the period ended June 30, 2000, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.




PricewaterhouseCoopers  LLP

Austin, Texas August 23, 2000, except for Notes III, XII and XV, as to which the
date is September 28, 2000 and Note II, as to which the date is April 9, 2001